Whether you’re on solid financial ground or your finances are bit rocky, if you are like most people your home is one of your biggest assets. But what are you supposed to do to protect that asset? There are a number of great legal options available to homeowners, but you need to be careful to choose the option that is right for you. Depending on your particular circumstances, picking the wrong option can hurt you more than help you.
The simplest option available to homeowners is one of the most effective. It’s called a Declaration of Homestead and you can file it on your own without a lawyer’s help. Each state operates a little differently, but in most states like Massachusetts it’s a matter of a simple form and paying a small fee. A Homestead can be filed for your principal (primary) residence, but not second homes or rental properties. It also can’t be filed if your home is held in a trust.
A Declaration of Homestead protects you from creditors who come after you for debts incurred after you get your homestead in place. What that means in Massachusetts is if a future creditor tries to attach your house or get the court to order a sale so they can be paid – the first $500,000 of equity per family is protected. It doesn’t matter if the creditor is coming after you, your spouse or your kids – you are covered. And it’s even better for people who are disabled or are 62 years of age or older. In those cases, it’s up to $500,000 of protection per person – not per family!
A Homestead protects you from most but not all types of creditors. For instance, a Homestead will not keep the IRS or your mortgage company from darkening your doorstep, and it doesn’t apply to outstanding child support or alimony payments. Even with a Homestead, you are on the hook for those obligations and a court can order the sale of your house to secure payment. All in all though – it is one if not the best protections for homeowners and again, you can do it on your own. If you refinance or get a second mortgage or line of equity, ask your attorney about whether you need to re-file your homestead.
People often ask whether putting a house in trust offers more protection against creditors. Contrary to what many people think – the answer is generally “no.” Except in the case of when you relinquish all ownership and control of your property, a trust does not shield you from creditors. Many people waste their time and money setting up real estate trusts they don’t need and don’t do them any good. If an attorney suggests you need to set up a trust for your home, ask the million dollar question – “Why do I need one?”
As to adding adult children’s names on a deed or transferring a house to them outright, while these can sometimes be effective tool for estate planning and Medicaid planning purposes, you would never want to consider doing so without talking to an attorney who specializes in these areas. There are a lot of things to consider that the right attorney can help you work through. Keep in mind though, if somebody else’s name is on your deed and they run into trouble – your home could be up for grabs! People get into trouble with this all the time.
Imagine putting your adult son’s or daughter’s name on the deed to your house and then your son or daughter gets into trouble – they get into an accident and hurt someone, they run up credit card debt, whatever. Their creditors can come after your home to satisfy the debt! Or that adult child goes through a divorce. Their spouse can claim that they are entitled to some of the equity in your home! And here’s another scenario – you put one but not all of your adult children on the deed to your house and then you and your spouse die. The children not listed on the deed are left high and dry – regardless of what your Will says! The child or children on the deed have no obligation to “share the wealth” and if they do want to give something to a sibling, the amount will be subject to the gift tax laws.
The long and short of it is, you need to really think carefully about what makes sense for your particular situation. Make sure you consider all the options available to you to cover what is one of your greatest assets, and take advantage of the ones that will put you the most solid footing!