Many people underestimate the importance of putting asset protection strategies. In a majority of cases, their ability to safeguard their most prized possessions is left until it’s too late.
More than ever before, life is bringing uncertainty for all of us, and unexpected events can occur at any time, meaning there’s always the potential for risks. For example, your business might be a party to a lawsuit, or you could have to settle a divorce with your ex. These situations can catch you off-guard when you least expect it, and can heavily affect the ownership of your assets.
To combat these situations, asset protection strategies are recommended to shield your personal wealth. To help you understand this concept better, we’ve isolated the top five strategies that you should know about this year.
1. Establish a Discretionary Trust
A trust is a relationship between various parties that is legally recognised. It involves a trustee and one or more beneficiaries, where the trustee is the one who holds assets in their name in the trust, and the trust’s beneficiaries will be entitled to those assets.
A trust is not an entity in its own right. For this reason, it is deemed a common form of property protection because it sn’t able to be sued, like individuals and companies can be.
Many Australians opt for a discretionary trust due to its flexibility when it comes to distributing the income. The trustee can use their own discretion on how their trust income should be distributed between the beneficiaries, giving them complete control over the process.
However, it’s important to understan dthat any personal assets that are moved into a trust will no longer be yours – the trust will be their new legal owner. Finally, transferring assets in this manner can also attract high stamp duty costs, as well as capital gains tax.
A family trust is a type of discretionary trust that is often used for asset protection.
Individuals who own property – as well as property investors – can use a family trust for asset protection due to the separation it creates between the trustee and the beneficiaries.
This divide is seen as a positive thing: the beneficiaries don’t have any right to the property in the trust, so if one of them becomes liable to settle debt, a creditor cannot get an order against any of the properties.
If a discretionary trust is used to by interests in businesses, shares in companies or investment properties, the trust can allocate its own creditors. In this case, the creditors have a right to any property that is held in the trust.
2. Assess Your Business Structure
If you’re a business owner and carry assets like property in your personal name, it’s important to consider asset protection strategies if your business is restructuring. The below business structures give you an indication of the options available to you in Australia.
A business that is a company structure is established as a separate legal entity. This means that while the company can be sued for any outstanding debt, your personal assets are protected.
If you’d like to set up, register and start running a company, there are certain legal requirements involved. It’s worth employing an asset protection specialist to ensure all the criteria are met.
Partnership or Sole Trader
Partnerships and sole traders are business structures to avoid because, in this position, you are held personally liable for any of the business’ financial or tax debts. Therefore, your personal assets can be used to settle any of your professional obligations.
Asset protection is a lot harder to build in this scenario.
3. Transfer Your Personal Assets To Your Spouse
If you carry a higher risk of being sued than your spouse, an asset protection strategy can be to put into place to transfer your assets in your spouse’s name.
Generally, your creditors won’t be able to get hold of any assets that are not in your name, but rather your spouse’s, making the process harder for them to obtain any of your valuables.
If you’re buying a family home or investment property, we recommend structuring it so that the lower-risk spouse is the one taking out the home loan. This will make it more difficult for the property to fall under the control of a trustee if you declare bankruptcy.
4. Take Out Insurance
While insurance is a good asset protection strategy, it’s best used in conjunction with other avenues, as it will never cover absolutely everything. For example, business insurance will only provide protection in specific scenarios appropriate to the business, and won’t protect the personal assets from circumstances that occur outside of professional circumstances.
The good news is that these policies are relatively inexpensive, so it’s always nice to have the extra security to protect assets. Just ensure you understand what is and isn’t covered under the policy. Consult an insurance broker to identify the best option to suit you and your business.
Here are examples of types of business insurance:
This insurance will pay the cost of legal action, as well as any compensation claims made against your business if a client or member of the public incurs personal injury or damage to their property as a direct result of your business.
This protects your business against any negligence claims or breach of duty as a result of professional services performed.
This covers the wages of your employees and any other related costs if they require treatment due to a work-related injury or illness.
5. Speak To a Professional
Whether you’re a business owner or are working on growing your investment property portfolio, it can be overwhelming to make and implement an asset protection plan. It’s hard to identify what will be a business risk and what will best protect your assets.
A financial planning professional can help you determine the best legal strategies to put into place for any possible scenario that could occur in your particular situation.
It’s easy to assume bankruptcy will never happen to you, but it can occur completely out of the blue. For this reason, it’s important to have asset protection strategies in place as an all-important lifeline.
Five ways to ensure asset protection include:
- Establishing a discretionary trust
- Setting up a company business structure
- Transferring your personal assets to your spouse if they’re lower risk than you
- Taking out an insurance policy
- Employing the services of an asset protection professional.
KNS Accountants can assist with an asset protection plan personally tailored to you and your personal or business assets held. We will also identify any tax benefits or extra costs applicable. Contact our professional team today to arrange a consultation.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek your own advice for any legal or tax issues raised in your business affairs.