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Diagram Training Equity Strip

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1. A client owns a home worth $5 million with $500,000 of equity. Their attorney recommends an equity strip using a revolving home equity line of credit (HELOC) of $500,000 secured by a deed of trust, with the family bank as lender. From an asset protection standpoint, what does the equity strip accomplish?
It removes the home from the client's name entirely, placing legal title in the family bank. It converts the home equity into a tax-free gift to the client's beneficiaries. . It creates a $500,000 secured creditor lien in favor of the family bank that has priority over any future unsecured creditors, effectively making the equity unavailable to them. It triggers a homestead exemption that protects the entire property value from all creditor claims.
2. A client has a home with a fair market value of $5 million and a $5 million mortgage (equity strip) secured in favor of the family bank. The client dies. What are the estate tax and basis consequences at death given the $5 million mortgage?
The home is excluded from the taxable estate because the equity is zero, and no step-up in basis is available. The full $5 million fair market value is included for step-up in basis purposes even though there is no net equity in the estate — the client gets a full step-up while carrying little or no estate tax exposure from the home's equity. The mortgage is treated as a gift to the family bank at death, triggering estate tax on the full $5 million. The step-up in basis is limited to the net equity value — zero — resulting in no cost basis benefit.
3. What is the relationship between the equity strip and the family bank (limited partnership or LLC)?
The family bank is the lender — it extends the home equity line of credit to the client, holds the promissory note, and is secured by the deed of trust on the residence. The family bank is the borrower under the equity strip; the client is the lender. The family bank holds title to the home as nominee for the client during the term of the credit line. The family bank co-signs the mortgage with the client to satisfy lender underwriting requirements.