A home is an incredibly important asset. On a basic level, it’s a place you live and use to be sheltered from the outdoors. On a relational level, it’s a place you raise your family. On a financial level, it’s an asset you expect to appreciate in value and one day be able to sell or pass down to your beneficiaries.
Unfortunately, your home as with all assets is at risk to lawsuits and creditors. This could be from a personal debt (i.e. home or car loan) or business debt (i.e. loan to purchase an investment property or personal guarantee of a company loan). If you or your business is unable to pay the loan and are in default, you could be sued. If a judgment is entered, a creditor could take action against your assets and potentially your home. A lawsuit could also arise from a personal action (i.e. a car or boating accident) or business action (i.e. physician malpractice, architect/engineer negligence, or business dispute). If that lawsuit results in a judgment, the creditor will be able to take legal action against your assets and possibly against your home.
To protect your home from lawsuits and creditors, these are certain rules to follow and planning to pursue:
- Avoid titling the home in your joint living trust. If you’re married and have created a joint living trust to avoid probate, you should not have the ownership of your house in the trust. A joint living trust does not protect your home from creditors. Michigan law does not provide asset protection to this type of living trust because the trust is revocable, you’re a trustee, and you’ve created the trust as well as transferred the home to it.
- Title the home in the name of the spouse or spouse’s trust who is least likely to be sued. For some married couples, one spouse has a greater risk of being sued and exposed to lawsuits. That spouse may be a business owner who has signed personal guarantees. It could be a real estate investor or developer who has personally signed loans. It could also be a professional who is at a risk of malpractice. Titling the home in the name of the other spouse who is less exposed to creditors is a good option. That way, a lawsuit less likely to be entered against that spouse and the home should be more protected from creditors.
- Title the home as tenancy by the entirety with your spouse. In Michigan, a married couple can own a home as “tenancy by the entirety.” This is a type of ownership that’s protected from creditors. Also, tenancy by the entirety ownership protects the home from the creditors of both spouses. For this reason, its almost always a better option than putting the home in one spouse’s name. A spouse who is generally less exposed to liabilities could still be liable in an accident due to negligence. Also, a “ladybird deed” should be signed as part of this planning. This deed will typically name a trust as the beneficiary to avoid probate and accomplish an important estate planning goal. Alternatively, if a couple has separate or “AB” trusts (i.e. each spouse has a trust) further protection can be added to the ownership of the home. This is known as a “first-to-pass” ladybird deed. In this structure, if one spouse passes first, the ownership of the home is transferred to that spouse’s trust. If it’s an A/B trust, that trust can be structured to provide a significant amount of protection from lawsuits and any creditors of the surviving spouse. That way, if the surviving spouse was sued or is exposed to lawsuits and creditors in the future, the home will be protected.
