Overview: Equity Stripping
Equity stripping combined with an Equity Reduction Plan (“ERP”), is a highly effective and sophisticated form of asset protection.
Depending on the circumstances and the type of assets involved, an ERP can be used by itself or in combination with other techniques.
An ERP is designed to protect equity in real estate or business assets from a potential future claim.
- Real estate assets are always vulnerable to a lawsuit. During the last 10 years there has been a dramatic increase in the value of most properties. A significant portion of your net worth may have shifted from stocks to real estate equity.
- Physicians and other professionals have additional value locked inside their practice in the form of accounts receivable and equipment. A lawsuit against the practice from a patient or employee exposes these assets to risk of loss.
- Business owners may have inventory, equipment, patents, and trademarks in addition to accounts receivable. If these assets have value it is logical and prudent to protect them from the risks of the business.
In many situations, where movement of an asset is impossible or impractical, equity stripping within an ERP can move the equity or the value of an asset into a protected position. Ownership of the underlying property remains the same and need not be transferred. This is a clear advantage in many situations:
- Those who own multiple properties can avoid the inconvenience and cost associated with forming several Limited Liability Companies.
- An ERP protects the equity in a property from a claim arising out of the property itself (an “inside” liability).This cannot be accomplished with an LLC or any other entity.
- An ERP avoids a transfer of real estate ownership and potential problems with increased property taxes, transfer taxes and due on sale clauses from a lender.Accounts receivable usually cannot be transferred out of a professional practice because of accounting problems and insurance company restrictions.An ERP is the only technique available to insure the protection of the cash flow cycle of billing and collection.
- Similarly, the inventory, equipment and intellectual property in a business are essential for operations and future success. An ERP is designed to avoid disruption or loss of the business by protecting these assets.
- Valuable but unproductive equity in real estate, accounts receivable and business property can be leveraged for business or investment purposes. These dormant assets can be put to work in an ERP, enhancing asset protection and generating additional income.