Cautions To Take With Equity Stripping Asset Protection – Video
Video Transcript
His question has to do with equity stripping. If you have a million dollars in equity, why don’t you just leverage it up? That is one strategy. Now, there are some problems with it.
First of all, does it fit your economic profile? How many free and clear people go bankrupt? Zip. I’m not saying I’m for or against. It’s just a lot of times, economic considerations interfere with that. Furthermore, what did you do with the money? Where did it go? Is it protected?
Now, if your strategy uses this, get the equity out of your properties and put the cash offshore, that can be some excellent asset protection. What’s the problem? What are you going to invest in? What are the returns on it? Especially in this day and age where returns on conventional-type investments are very low, you may not get the return that you want. It’s a legitimate strategy as long as it’s what? Real.
The IRS operates on substance over form. If you put in, for example, fake liens, both IRS or a regular court, for asset protection, because I’ve heard that put out there, make the property look leveraged. I’ll just slap a lien on it. Could that be viewed as fraudulent? Yes. If you’re going to do the equity stripping, in other words, you’re going to leverage properties up, make sure you actually lever them up.
It could be internal financing, you might set up a separate entity that is functionally a lender and it lends money on the property, but you actually have to have the money trade hands, it’s not just on paper, it has to be in fact. Yes, a legitimate strategy as long as it doesn’t clash with your economics. In my case, I would rather have fewer properties free and clear, you start with them leveraged, but as they pay down, you get older, you want to do other things
