Equity Stripping – Creating A Plan

David Southwell

There are a number of viable alternative plans for equity stripping and for protecting your home and other assets. We recognize that everybody’s financial situation is unique and work with everybody individually to tailor a plan that best protects their properties.

Equity-Stripping Plan Utilizes A Charitable Trust

The Plan illustrated utilizes a Community Support Organization, a Family Limited Liability Company, and a “Hard Equity” Lending organization. We used the amount of $100,000 in this illustration for the sake of clarity. The steps are simple:

—The Client forms a specially drafted Community Support Organization (CSO) and donates $100,000 in cash or in other assets that may be utilized to produce that amount of cash within the CSO. The tax-savings we estimated as $40,000 resulting from utilizing the gift to the CSO as a charitable deduction.

—An offshore asset protection trust is formed as a tax-neutral trust. A domestic trust could also be utilized, if desired, and at less cost. This trust becomes the managing member of a Family Limited Liability Company that is formed for the client and his/her family.

—A Family Limited Liability Company is formed with the asset protection trust as the managing member, holding only a very small portion of the FLLC, and the family members as non-managing (or non-voting members) holding the balance of the interest in the FLLC.

—The FLLC applies for a loan from a third party lending agency and the non-managing members offer their real estate as collateral for the loan. A special type of loan instrument is created that allows the loan principal to increase with future advances and is structured to cover the equity in the property.

—The third party lending agency obtains funds from the CSO (limited to 75% of the available funds in the CSO for secured transactions) and then advances the funds to the FLLC.

—The funds from the mortgage and the funds generated by the tax deduction are combined and utilized through the hard equity lending organization. The client may, of course, elect to invest the available funds in other programs of their own choosing.

The result of this plan is that the equity in the property is covered by a lien against its full value, the resulting funds (obtained through tax-deduction benefits and a loan from the CSO) are invested in first and second mortgages at rates which exceed the rate paid by the FLLC. This program protects your equity and produces the cash flow needed to make the program effective.

Equity-Stripping Plan

Utilizing Asset Protection Trusts Or Other Entities

The Plan above is modified by substituting the Community Support Organization with a different entity, such as an asset protection trust, and modified by flowing the funds to the third party lending agency through a different route not depicted on the illustration. The end result is that the asset protection trust holds a secured interest in the mortgage granted over the property and the cash that was exchanged for the mortgage is held in a FLLC where it may be invested for a return and thereby produce a cash flow to cover the principal and interest payments required by the mortgage.

The result of the alternative plans is a satisfactory, though less powerful structure. The alternative plans offer a less tax efficient means of producing the cash flow to cover the resulting mortgage than would be obtained by utilizing the charitable trust program we illustrated.

David Southwell

David Southwell has spent his business career providing tax, wealth transfer, asset protection planning, and business and financial advisory services for domestic and international clients. David is a Member of the American Institute of Certified Public Accountants, the Florida Institute of Certified Public Accountants and is a Member of The Society of Trust and Estate Practitioners.

David has provided advisory services to clients engaged in international trading of food, fertilizer, metals and petroleum commodities and infrastructure programs with third world nations, including international marketing, buy/sell contracts, contracts dealing with international relationships and financial programs, letters of credit, banking relationships, business development, and has provided treasury and custodial services to clients for whom Trust Advisors Corporation serves as Paymaster/Custodian.

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