“Asset Protection” means taking steps to keep people who are suing you for money owed, from taking your money or house. I had a house-flipper client who successfully protected a house a while ago, only to have the IRS come after it recently. It’s a really complicated story. But I tell it to illustrate my point: I solve really messy tax problems for a living.
My client Steve remodeled and flipped houses. A decade ago, there was trouble with one of his flips. He was worried his client would sue him, and possibly get a judgment on a house Steve owned at the time worth a million bucks.
Steve asked his friend Abel to take ownership of the house temporarily. Steve gave Abel the deed for the house. No money changed hands. Abel understood he’d give the house back to Steve. Abel recorded the new deed in his name. Legally, it looked like Abel owned the house. But Steve lived at the house, paid the mortgage, property taxes, and for repairs and remodeling. Abel never lived at the house, and neither benefited from his legal ownership nor paid any house-related expenses.
This asset-protection strategy wasn’t a magic solution. It would really only work to slow down the disgruntled client. If the client sued and got a judgment, he could go through Steve’s financial records and discover that the house was given to Abel for free. Courts could reverse the transaction as a “fraudulent transfer.” (The disgruntled guy never did sue my client).
A few years later, when the Steve’s disgruntled client hadn’t sued, Steve asked for the house back. Abel signed the deed back over to Steve. Steve gave the deed to his realtor buddy, Carl, to file. But Carl was lazy. He didn’t record the deed. Legally, it looked like Abel still owned the house.
Then Abel started having tax problems. The IRS filed notice of tax lien against Abel. This meant that Abel could not sell an asset without paying $300,000 to the tax authorities first. When my client Steve decided to sell the house last year, the title company wanted to pay the IRS the first $300,000 from the proceeds of the sale – to satisfy Abel’s tax debt. After all, the deed where Abel gave back the deed to Steve was never recorded. The IRS and the title company thought Abel was the owner.
That’s when Steve found me. I put together a packet for the IRS’s lien specialists telling the whole story and convinced them that the IRS’s interest in the house was worth zero. Abel, who owed the tax, did not share any of the benefits or burdens of ownership of the asset. The asset, the house, could not be used to satisfy Abel’s tax debt. The IRS agreed and Steve walked away with all proceeds of the sale.
Most people (even attorneys) I tell this story to think that Steve would just be screwed. How can you get the IRS to ignore a recorded home? That’s where years of experience dealing with tax audit and collection issues, knowing the law, comes in handy.
July 30, 2019