Personal ownership of property (real and personal) is a long-held status symbol for most people. When people hear “status symbol”, they tend to think of flashy cars, designer clothing, or large homes.
However, even those who fancy themselves financially responsible own their home, vehicles, and other assets in their own name, looking with satisfaction at their modest lifestyles and “net worth.”
However, when people own their property they (1) set themselves up for disaster and (2) end up not paying themselves first.
Courting Disaster
When people own property in their own name, it can be taken from them quite easily. A lost job, a lawsuit stemming from a car accident, divorce, or any number of other risks can spring upon them at any time. Unexpected medical expenses from an accident, heart attack, cancer, or other untimely unwanted events can quickly leave one vulnerable to creditors.
Even those who have emergency funds, who can weather several months of no income can find themselves out of cash with courts ordering a house’s equity to be taken from them, equity that they’ve created by diligently paying down their mortgage with their hard-earned money.
Paying Other First
When people have earned income, others have claim to their money first. The most obvious are the various taxes taken out of a paycheck before it even hits direct deposit, but others are more subtle.
Control But Do Not Own
Courting disaster and paying others first when not necessary isn’t the best of strategies, given that alternatives exist. Rather than owning a house, a car, a load of paper, etc. it is recommended that one control these things without ownership.
For example, a properly constructed Illinois-style title-holding land trust allows one to not own a home, but still retain all the benefits of ownership. (I recommend people attend a NARS 2.5 day workshop to get a first-rate education in this area.) These are very different from the family living trusts designed to avoid probate, but which afford no legal protection.
Unfortunately, many probate lawyers give the false impression that these tools will offer protection despite endless case law in which these types of trusts are declared dry (meaning they’re invalid) when it comes to asset protection. As of this writing, experts in the field have not found a single case where a correctly constructed equity-holding trust has been declared dry. Use the traditional family trusts to avoid probate, but lock up your property in water-tight structures, such as what NARS educates people on. Put your beneficial interest in the home’s EHT in the family trust, not your home itself.
As far as paying yourself first, businesses are an excellent method to have access to pre-tax dollars, allowing one to spend before even the IRS gets a crack at the money. This must be done correctly and legitimately. Be sure to become educated on the ins and outs to avoid risk. (Remember, it’s you as the human that governs risk.)
Hopefully this will stimulate some thought. Most anything can be controlled without ownership. It takes some stretching of one’s paradigm to see how this can be possible, but it’s been the norm for money wise people for hundreds of years.
FYI, I deleted a blatant advertisement. Randy, if you wish to engage in a dialog instead of spamming us, you’re quite welcome here.
WARNING! Education will save your behind! There are people who claim to be “THE experts” out there, but say and do bizarre things.
Comment by thereisnodollar — May 26, 2008 @ 3:58 pm
I think that is why it is important to have 6 months of income saved, so if you lose a job or are in accident, then you have the money to pay it and don’t have to worry about losing your home.
The expert I have listened to says that you should do that and pay off all bills before tackling your home.
Are you saying to NEVER pay off your home?
Debbi
Comment by Debbi — May 26, 2008 @ 5:17 pm
@Debbi:
A cache of cash can help stand as a defense for certain situations, but it’s not a cure-all.
Wearing a bullet-proof vest doesn’t mean you won’t die from a gunshot wound. There are places that it doesn’t cover, and isn’t sure proof against a bullet. Likewise, there are a whole category of events where cash is not a useful preventive tool. For example, it won’t stay off a contractor’s lien (justified or fraudulent), tax lien, help in a divorce, or prevent a court from attaching the property for any other reason. Even if you don’t get hurt in an accident, it’s possible to be liable for another’s medical expenses beyond what insurance will cover. For most people, the car insurance medical portion isn’t that big. (Additionally, if you have a stash of cash in your name, the stash itself can be a target. It’s an asset that can be frozen, seized, or otherwise attached.)
Controlling but not owning property (in your name) adds a layer of protection from these types of events.
As to paying off one’s home, I never addressed that here. What one does with the loan is a separate topic.
Now, don’t read into this that which I didn’t say. I’m not saying to not have emergency resources. My entire wish is to invite people to look look beyond traditional simple ownership of real and personal property. We’ve been passed conventional wisdom and never given the chance to put those ideas through the ringer to see if they hold up. I hope that some will find this useful.
I hope that helps clarify some.
Comment by thereisnodollar — May 26, 2008 @ 6:56 pm
I’m traveling right now (coming home tomorrow!), but this is an interesting post. My first thought is that for the risks you’ve described, being properly insured should take care of most problems. Yes, policies have limits, but you should be able to mitigate most risk to your assets.
My second thought is at what asset level would you consider it worth going through the trouble and expense of maintaining assets in a trust instead of just owning them? You need a lawyer to set up the trust in the first place, and don’t you have to pay to add or remove things from the trust, too? (I’m not sure how this works exactly.) How much insurance can you buy for the cost of the trust?
Also, I’m not interested in ducking bills that are morally mine. If I injure someone in a car accident and they max out my insurance policy, I would have a hard time saying “too bad, I’m broke” when I have (control of) a bunch of assets in a trust. That’s not the (main) point here, is it? I know this isn’t what you said in the post, but it seems to follow logically so I wanted to ask explicitly.
Comment by Stephanie O — May 30, 2008 @ 6:29 am
Sorry for the delay in getting back to this. Stephanie O, you’re brain’s really going here.
You bring up a classic discussion, between asset protection and insurance. Control vs. ownership is often done through asset protection mechanisms, but not always. For example, putting ownership of vehicles in LLCs is a quick and easy method of moving from ownership to control. However, it is very common so it’s good to bring up the subject.
Insurance and asset protection serve two different purposes. Insurance is designed to help when “stuff” happens. One can’t substitute insurance for anything else when that happens. Asset protection is to help “stuff” from happening in the first place. For example, lawyers are funny creatures and tend to not want to work too hard to get their cut of the action. Normally they’ll stop at the first layer of asset protection and tell their clients that it’s not worth it. If there are multiple layers, only people like criminal investigators will go there. Controlling assets rather than owning them reduces one’s amount of exposure.
There are things that insurance can’t compensate for, and there are things for which one can’t buy insurance.
I think of insurance vs. protection this way. Using protection wisely is like being wise about locking your house up etc. when you go out. You could buy lots of insurance in the case of theft, but leave your doors wide open all the time. Yes, insurance would help if my house was burglarized, but why not lock the doors *and* have insurance?
If I habitually walk down the middle of the road, I can load up on health insurance, but no amount of insurance can reduce the amount of risk that the middle of the road path carries (compared to the sidewalk).
For your second thought, it comes back to the individual. Education will drive one’s actions. For example, people are taught that lawyers have to be involved, that it’s expensive, complicated, etc. Well, one doesn’t always need to use things that are complicated, for example, moving some property into an LLC is trivial. Anybody can do that with their house, even, with a simple quit claim deed. With real property that opens up a different bit of risk, monkeys with your taxes, etc. which is where education becomes helpful. I tend to like the title-holding land trust per the NARS model simply because it avoid or accounts for most of the pitfalls. There is money involved, but there is also money involved in insurance.
I recommend that people become educated on these things so that they can made good decisions on a case by case basis. Without the knowledge, they’re running on a bunch of assumptions. One can’t make a good decision in the dark.
Lastly, I’m not sure why you think that control vs. ownership has anything to do with “ducking bills that are morally [yours]“. I think I see where you’re coming from; sorry if I miss the mark. Feel free to clarify.
Control is a tool for stewardship over one’s possessions. As a tool, it in and of itself is neither good nor evil. The actions of the person wielding the tool can be good or evil. In the same vein, money can be used for evil purposes, but that doesn’t mean that I should avoid money. The written word can be used for evil purposes, but that doesn’t mean that I should avoid reading or writing.
If you were in the situation you described, and had a judgement against you for those medical costs, you would have a choice to make. You could choose to use the law to just declare bankruptcy and walk away from the situation. That’s a possible example for your “too bad, I’m broke” scenario. However, you could choose to make use of those assets that you control to make good on the problems you caused. There are different ways to do that, and you would be able to exercise your wisdom and discretion. Without control, with ownership, then moral agency is removed from you and the courts can exercise only one option, confiscation in one form or another. Courts are a blunt instrument with few options.
That’s one thing that I’ve observed over the years. Increased stewardship brings along with it increased responsibility. There are people who do not like that, and choose to avoid the burden of responsibility. Others are willing to shoulder the responsibility.
Good thoughts, Stephanie O.
Comment by thereisnodollar — June 9, 2008 @ 6:20 pm
Thanks for elaborating – I totally get how insurance and a trust (stewardship) would be complementary.
My head is spinning with questions, some centering around just what kind of legal protection the type of trust you’ve described provides. I have gathered from what you’ve written (and what I’ve read about those trusts elsewhere) that it makes it difficult for people to gauge your net worth, because (for example) it’s easy to find real estate assets when they are held in your name instead of in a trust. I understand how this would perhaps prevent an unscrupulous lawyer from suing you, because they don’t think there’s money to win. I can see how that is a substantial benefit, even though I don’t expect to be sued. (I’m sure everyone says that, until they get served with papers.)
But if you were sued anyway and lost, would the trust provide protection in that case?
My other question is probably just something an individual would have to decide for themselves, but do you have suggestions about at what point in building assets that a trust becomes necessary? Surely a kid out of college with a car and an apartment doesn’t need one. When you have a house with a big mortgage (80%) should that be in a trust? Is there a rule of thumb? I can see how being in a higher risk (for lawsuits) profession might make it desirable (being a doctor, or running your own business etc). Just pondering…
Thanks for the brain-food.
Comment by Stephanie O — June 13, 2008 @ 3:21 am
Somehow i missed the point. Probably lost in translation
Anyway … nice blog to visit.
cheers, Antarctic
Comment by Antarctic — June 19, 2008 @ 1:11 pm