Examples

Examples We can make these advantages clear with several examples of how equity stripping stripping combined with an ERP solved particular asset protection problems.

Client A owned 6 rental houses that he had purchased and renovated over the years. Most of his surplus cash went into buying and fixing up the properties. Sometimes he sold a property and reinvested the proceeds. Our view is that rental real estate is always a “Dangerous Asset” creating potential lawsuit liability from tenants, visitors and buyers and sellers. There are three possible asset protection plans:

1. All the properties in one LLC. We could form one LLC and put all the properties in that single company.

   Advantage-Client is protected from liability associated with the properties. He cannot be sued if there is a claim arising from any property. This is also relatively inexpensive to establish and maintain.

   Disadvantage-The combined equity of the properties is available to satisfy a claim arising from any property. If someone is injured at one property and successfully sues the LLC owner, the equity value of each property is exposed to this claim

2. Separate Limited Liability Companies. We could form six new LLC’s and transfer each property to it’s own LLC.

   Advantage-A liability produced by one of the properties would be insulated and contained. Neither the other properties nor Client would be at risk.

   Disadvantage-The equity in the particular property is exposed to the liability created by that property.  If a tenant is injured in the house owned by LLC #1, although the other properties are not exposed, the equity in that property is available to satisfy the claim. Potential loss has been substantially reduced but still remains.

3. Equity Stripping in Combination With an Equity Reduction Plan-An ERP presents a partial or complete solution.

   Advantage-We can form one LLC to limit Client’s exposure to liability from all of the properties. By transferring property equity into an ERP, no portion of the accumulated equity is at risk. An accident at one property presents no risk to the equity of that property or to the equity in other properties. Whatever value has accumulated in the properties is shielded from any liability-regardless of the source. If the Client is sued for any reason, 100% of the value of the properties has been protected.

   Disadvantage-We achieve full protection which could not be accomplished in any other way so there is no particular disadvantage to this plan. As with all asset protection plans, the cost of insuring against a risk must be weighed against the amount of the potential loss. It doesn’t make sense to pay $100 to insure an asset with $100 in value. Depending upon the degree of risk involved it may make sense to pay $100 to insure an asset worth $5,000. Legal fees and maintenance costs for an ERP must be balanced against the amount and likelihood of a potential liability.

Client B owns a commercial property with substantial equity.

The analysis should be clear. If we put the building in an LLC we protect Client against liabilities arising from the property. However, the full amount of the equity is exposed in the event of such a claim. Again, we would form an LLC to hold the property and use an ERP to protect the value.


Client C is a physician.

He has valuable accounts receivable in his practice.

Sometimes, transferring an asset, such as accounts receivable will create tax, accounting or administrative problems. Instead, an ERP legally transfers the equity in the asset, not the asset itself into a protected position. Using this approach we avoid difficult issues but still protect the accounts receivable. If Client C is sued someday in the future, instead of losing the collections on the accounts receivable, funds are protected in the ERP and cannot be seized by a successful plaintiff.