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Downturn in the Real Estate Market Leads to More Asset Protection Planning
Jacob Stein Esq. January 10, 2008 — 1,119 views
Following the credit crunch of August 2007, the real estate market has experienced a significant decline. Many of our clients are heavily invested in real estate or are involved in various development projects. For them, the reality of the declining market means a lot more than an interesting headline. It means that their entire estate may be facing a risk of loss. Here is a real life example.
Dr. Mehta always encouraged his children to be entrepreneurial. So when his son undertook his first real estate development project, Dr. Mehta helped him by personally guaranteeing $1 million in loans.
Dr. Mehta was completely surprised when in October of 2007 the real estate development went sour and his son began talking about a possible default on the bank loan. Mindful of the personal guaranty he signed, Dr. Mehta retained our firm for asset protection planning.
He had three primary assets: his personal residence with approximately $1 million of equity, his medical practice, and a brokerage account with approximately $700,000 of investments.
We analyzed Dr. Mehta's situation and quickly determined that for him the best course of action was to encumber his personal residence and to then transfer the ownership of the residence into an irrevocable trust. Dr. Mehta obtained a bank loan and then deposited the loan proceeds into a Swiss investment account. He was able to maintain a positive spread on his bank loan versus his investment return.
Dr. Mehta then moved the contents of his domestic investment account into the same offshore investment structure as the loan proceeds. Because that can be easily done without selling the underlying securities, there were not tax consequences to the transfer.
In the short period of October to December 2007 we represented 24 clients in exactly the same position as Dr. Mehta, i.e., real estate developers with outstanding personal guarantees and upside down projects. Personal guarantees ranged from as little as $500,000 to as much as $130,000,000.
We believe that this trend is likely to continue well into 2008. Real estate investors and developers who do not act quickly will find large banks hard on their heels and their precious assets at risk. We encourage all real estate investors and developers to act quickly and implement structures to protect their hard-earned assets, before it is too late.
Mr. Stein is a partner with the law firm Boldra, Klueger and Stein, LLP, in Los Angeles, California. The firm's practice is limited to asset protection, domestic and international tax planning, and structuring complex business transactions. The firm's goal is to provide the highest quality legal work that is usually associated with only the biggest law firms, in a boutique firm setting.
Jacob received his law degree from the University of Southern California, and his Master's of Law in Taxation from Georgetown University. Mr. Stein has been accredited by the State Bar of California as a Certified Tax Law Specialist and is AV-rated (highest possible rating) by Martindale-Hubbell.