What are some tips for asset protection?
We all work very hard and would love to know that what we have saved and accumulated is protected from frivolous and malicious claims by those trying to make a quick buck. Equally, we desire to ensure that the assets we have accumulated are directed to those that we wish to benefit from our hard work.
This article attempts to walk the fine line between asset protection and estate planning, which inevitably also takes into account family law provisions.
There are very few certainties in life, and asset protection is something that can be planned and structured but can all be undone by a court of law. Here are some tips to take into consideration when trying to protect your assets.
- Who owns the asset?: It is good practice to begin with who is the most “at risk” individual and should that person own any assets.
What does “high risk” mean?
If a person is running a business or is in a career where they can potentially be sued, they may wish to consider if they should be the direct owner of any assets.
Ownership can take the form of individual, joint, Trust or Company.
It is important to consider that if your family home is purchased in a spouse’s name, then the other person has no control over the asset’s sale or refinancing. A potentially strategy to mitigate this risk is for the “at risk” person to own 1% of the home, with the spouse owning the remaining 99%. This mitigates control risk, while also achieving a level of asset ownership separation.
- Should I consider using a Trust?: This is common question and does not have a clear answer. The size of your asset base will dictate if a structure such as a Trust, makes financial sense. Remember that an accountant will need to prepare Financials, Accounts and Income Tax Returns for the entities you choose to establish.
If you choose to own assets via a Trust structure, you will need to choose who the Appointor, Trustee and beneficiaries are. The Appointor is the most powerful person and can hire and fire the Trustee. So, if you are the “at risk” person, you may not wish to hold that position. But, you need to recognise that you will have no control over the assets in the Trust – the Appointor will.
The other consideration is if you have individual or a company as a Trustee.
It is easier to identify individual trustees and difficult to differentiate if the “at risk” person is acting in their personal capacity, or in the capacity as Trustee of a Trust. Therefore, you will often see Trust structures with a company as Trustee (known as a Corporate Trustee), where there are Directors and shareholders. The name of the company may have no resemblance to the “at risk” person and it is easier to identify their role as a Director of the company (than what it is as an individual).
- Should I consider a Company?: As noted above, the financial consideration also needs to be taken into account with Accounting fees. The roles in a company are the Directors and the shareholders. Shareholders can also hold different types of shares that have voting, capital and/or income rights. This is all defined in the Company Constitution and Articles of Association. The Directors are appointed by the shareholders (who would have voting rights). Therefore the “at risk” person would want to conder what position in the company they wish to hold to balance asset protection and control.
- Can I protect my assets if I die?: It is possible to protect your assets in the event of your death. You may have a beneficiary who is also an “at risk” person and so would not wish to receive any inheritance in their personal name. This would defeat any strategy they had in place for their own assets.
You can speak with your solicitor and ascertain if a “Testamentary Trust” may be appropriate to include in your estate planning.
A Testamentary Trust lays dormant in your Will and is only activated on the death of the testator. The beneficiary would receive any distribution from the estate (on the instruction from the testator in their Will) via a Trust Structure. This in turn should assist with continued asset protection for “at risk” beneficiaries, along the same lines as discussed under point 2 earlier.
Can I be certain that my assets will be protected if I follow the tips?: There are no certainties, but you can implement strategies that make it more difficult for frivolous and malicious claims to be successful.
This can be implemented via the tips outlined, which effectively add layers of protection that may deter the claimant to pursue it through the courts due to the costs involved.
The Family Law Courts are renowned for the ability to look through structures and arrangements to ensure that parties are treated equitably. We may not always agree with the Family Law Court decisions, but that is a matter of perspective on which side of the court room you reside.
The topic of asset protection is always a balance of protection, and control. If the “at risk” person wishes to relinquish control, then a great deal of trust is required in the individual who takes on that role. This is often where disputes can occur before there are any issues of asset protection. It is critically important to remember that the person in control has the control and to change that may also necessitate hours in a courtroom that may cost thousands of dollars.
Seek professional advice: Asset protection is a specialist area. While this article has provided some tips, it is important to seek professional advice that is personalised to your circumstances. This can involve a solicitor, an accountant and a financial adviser to coordinate all aspects of the strategy.
