Several tools can protect your home from creditors

May 1, 2005

I have heard there are many different ways to protect a physician's home in the event of a major malpractice suit. Which technique is the safest?

Q. I have heard there are many different ways to protect a physician's home in the event of a major malpractice suit. Which technique is the safest?

On the other hand, some states, such as Florida, have an unlimited homestead exemption, allowing all of the equity in the home to be protected from creditors in most cases.

A trust can also be set up whereby the personal residence is actually gifted to the beneficiaries irrevocably via a Qualified Personal Residence Trust (QPRT). The person gifting the house to the QPRT gets to live in the house rent-free for a specified number of years, while maintaining the responsibility of home maintenance as well as paying the property taxes and any other home ownership expense incurred.

QPRTs can work very well as an asset-protection device, but generally only for those over the age of 65, because of these disadvantages typically associated with a QPRT:

Perhaps the simplest method of protecting the home from creditors involves using debt shields or "equity stripping." The homeowner takes out a large amount of debt (mortgage) on the home. If an asset has a very large percentage of debt associated with it, a successful creditor may not want to pursue that specific asset.

If the creditor does decide to go after the home, they will have to stand behind the first creditor (the bank or mortgage company) holding the loan against the asset. The proceeds from the "refinancing" of the home can then be available for investing in other asset-protected accounts such as family limited partnerships or generally asset-protected investments such as annuities and life insurance cash values.

There is no perfect way to protect your home from potential creditors, but there are certainly many different options to explore that may be successful in keeping creditors away, or at least frustrate them sufficiently that they move on to another case.

Q. Are we really going to see a major change in the Social Security system?

A. It certainly appears that way. President Bush has publicly emphasized his intention to push for a major reform of the Social Security system, which may mean the creation of private accounts for Americans under age 55. This will certainly not occur without much heated debate.