What is Equity Stripping for Asset Protection and Why You Should Know About Paper Equity Strips?

by | Jan 30, 2024

In asset protection planning, our main objective is to shield your valuable assets from potential creditors. A powerful method for achieving this is through “equity stripping.” This approach aims to minimize the equity in your property, making it less attractive to creditors seeking to seize your assets.

The equity in a property refers to the difference between its value and the debt owed on it. Creditors can only go after the equity in the property, not the entire property value. To strip the equity, we increase the debt encumbering the property while maintaining control over the funds borrowed.

Traditional methods involve obtaining additional loans or credit lines from banks or mortgage lenders, securing a new deed of trust on the property. However, sometimes these options may not be feasible due to credit limitations or excessive equity amounts.

Here’s where the “Paper Equity Strip” comes into play. It involves creating a transaction where no money changes hands but gives the appearance of a lien being placed on the property. A line of credit is established with a friend, a legal entity, or someone under your control. A deed of trust is then recorded against the property for the full amount of the line of credit. Although no actual funds are exchanged, this technique can discourage creditors.

While these methods can be effective, we must emphasize the importance of diligent asset protection planning. Creditor investigations may uncover superficial equity strips, rendering them ineffective. At @AliantLawFirm Private Client Practice, we design formidable asset protection strategies tailored to your unique circumstances.

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