Asset Protection

Asset Protection means implementing strategies to restrict the ability from loosing assets you own.

In practice we find that when clients do not have any assets of real value they are not concerned with obtaining professional advice on asset protection and related tax advice. However when clients accumulate wealth they become more concerned with losing this wealth, and then seek our advice on Asset Protection. Sometimes it’s too late when the client has asked us, ie after the point the client is being sued, or divorce proceedings have commenced. However where it is at a time before such events then we can assist you implement strategies to reduce the probability of you loosing your assets.

Generally the threats to your accumulated assets arise in the following broad categories: (1) Personal Risk; (2) Divorce (3) Death (4) Owning Rental properties; and (4) Carrying on a business or providing advice.

There are three layers of risk protection with each layer having its own asset protection strategies: (1) Insurance (2) Consider who owns your assets and (3) minimise risk by the way you carry out your work related activities that cause risk (4) legal undertakings (such as testamentary trusts – estate planning or binding financial arrangements).

1. Insurance – this may include professional indemnity insurance, directors indemnity insurance, “key man” insurance, public liability, building and office equipment insurance, income protection insurance, trauma, life insurance, etc… <to read more click here>

2. Asset Ownership – In principal if you don’t own assets then no one can sue you to take the assets, this means have your assets owned by the low risk person in your family. This principal of course means if you don’t own the assets then who does? and what risk does this carry? You may have heard that it’s better your non working spouse who carry’s less working/professional risk should own the assets. You may also have heard that it doesn’t matter that the non working spouse owns the assets in the event of divorce as the family court “looks through” structures and Superannuation when taking into account family assets subject to division. What happens if you’re not married, another popular method of owning assets other than by a low risk spouse is the use of a discretionary trust or a SMSF.  All of the above statements and questions raise issues that have many factors to be considered, therefore your personal circumstances need to be considered when determining what is the correct strategy for you.

SMSF and Discretionary Trusts – A brief comment … SMSF’s are generally not protected from divorce but are protected from creditors at time of bankruptcy except in specific limited circumstances. We always recommend that Corporate Trustees be used rather than Individual Trustees.

Trusts are generally not protected from divorce but are protected from creditors subject to whether you are considered to be in control of the trust. Recent cases commenced in 2006 and 2008 have shed light on this matter which we recommend clients read before requesting advice in this area. The two cases are 1. Richstar Enterprises Pty Ltd v Carey (No6) [2006] FCA 814; (Richstar) <McCullough Robertson><legal case> and 2.Kennon v Spry; Spry vs Kennon [2008] HCA 56 (‘Spry”) <legal case>. To understand Company structures <click here>. These cases state a number of important matters one of which is that its not enough that their may be additional Appointors or Trustees that demonstrate that no one person controls the Trust, but more importantly the manner in which the Trust is conducted and managed. Depending on whether the Trust is managed by one person or also by the additional Appointors and Trustees may be critical in forming a conclusion as to who controls the Trust.

Insolvency – Owning assets cannot protect you from loosing assets if you trade while insolvent. Insolvency laws are designed to protect creditors from corporate bodies continuing to use credit when they do no believe they can pay those debts. The laws are designed to allow creditors with an avenue for recovery of the corporate bodies directors personal assets to meet the debts of the company. Therefore it is critical for directors of corporate bodies to not trade while insolvent.  Accordingly, assets within a legal entity and directors personal assets outside the legal entity can become at risk. Insolvency means when an Corporate bodies (including corporate Trustees) debts cannot be paid as and when they fall due. Where any Company or Corporate Trustee has either negative assets on its balance sheet (liabilities more than its assets) or where their cash and short term assets cannot be realised to meets its debts as and when they fall due, then the legal entity and its directors should seek advice from an appropriate professional such as a practicing insolvency practitioner to confirm their solvency status and ensure that they cease trading as soon as the directors become aware they are in an insolvent position.  It is not uncommon to see directors transfer personal assets  into a company so that the company can met its debts as and when they fall due, only to see that the personal assets are reduced to nil and that company must still cease trading prior to becoming insolvent. Therefore it is important for the directors to understand the realistic viability of their business and its ability to continue trading and become profitable and ensure that at all times while trading the company can meet its debts as and when they fall  Often one of the telling signs of possible insolvency is receiving a creditor summons, repeat payment arrangements with creditors including the ATO and or receiving a director penalty notice (which also makes the directors personally liable for PAYG and GST debts recoverable by the ATO).  Corporate insolvency is governed by the <Corporations Act 2001 (Cth)>. Companies can be put into Voluntary Administration, Creditors Voluntary Liquidation & Court Liquidation. Secured creditors with registered charges are able to appoint Receivers and Receivers & Managers depending on their charge. Approporaite professionals that deal with this area of the law and corporations act include Bankruptcy Trustees and Insolvency Practitioners.

3. Minimise Exposure to risk – This means analyse your business or work that you do and identify areas of risk, for example a lawyer’s risk is providing incorrect advice that causes a client loss. Therefore client engagements letters including scope of advice provided, file notes of conversations, engage experts in other fields where the advice is required to do so, are all important strategies to minimise your exposure to risk. Therefore each person whether they are an electrical engineer on a $2B contract or a electrical tradesman on a $950 contract both will carry different levels of risk to the services they provide and therefore they should review how they can mitigate the risk in different ways relative to the potential risk.

4. Legal Undertakings –  Reducing risk should through legal undertakings such as contractual agreements when entering into commercial or personal undertakings.

  • Personal – for example if you are about to commence or are already in a defacto relationship  or marriage, the Family Law Act provides for the parties to enter into a binding legal agreement about the financial arrangements should their marriage or de facto relationship break down. Sometimes people know these agreements as ‘prenuptial agreements’ but the legal term is ‘financial agreements’. Another example is you wish to protect your assets you wish to pass on to your children against potential children divorce and asset splits, in these circumstances strategies involving the use of <testamentary trust> may be worth considering.
  • Commercial – if you are about to enter into a commercial arrangement, for example you are setting up a new company with new business partners, then a legal document such as heads of agreement, followed by directors/shareholders agreement can mitigate  risk from the multitude of events that can occur whilst operating a business.  There are many legal agreements and contracts that can assist in commercial arrangements and your legal advisers can assist in this regard, as Accountants we cannot prepare legal agreements.

The above  information is provided as general advice only, it should not be relied upon as it may not be suitable to the readers specific situation, the content has been provided to make the reader more informed in order to have a more productive meeting with the readers adviser, the information may become outdated and not relevant, the reader accepts our <disclaimer & terms of use> by viewing our website.