Who should think about asset protection?
There may be several scenarios where asset protection may be an important consideration. Commonly it is important for sole traders, company directors and potentially people committing to a new romantic relationship.
Why is it important?
Operating a business as a sole trader is often simple and convenient but this may place your business and personal assets at risk. Because you are personally liable for financial or tax debts in the business, assets in your name can be used to pay business debts.
Operating a company means that generally the entity is liable for business debts. However, if you are a director of the company, you may become personally liable for business debts if it can’t pay its debts (trading insolvent). A director is also personally liable for PAYG withholding and superannuation debts.
A second marriage has been characterised as the ‘triumph of hope over experience.’ For people entering a marriage with significant assets there may be a strong motivation to protect wealth. Especially the hopeful people walking down the aisle for the 2nd time who may have experienced the pain of financial agreements in an earlier marriage breakdown.
There may also be important estate planning objectives where people may prefer that their assets stay in the bloodline so to speak. This could be when parents help a child to buy a home and don’t want this to be at risk in the event the child experiences a relationship breakdown, and the home may become part of a financial agreement.
What can I do to protect my assets?
Appropriate insurance for a sole trader may be an important protection strategy. Public liability insurance for example may provide some protection in the event a claim is made against you and business for injuries or damage caused by negligent business activities.
It may also be prudent to consider strategies such as the ‘low risk’ spouse owning the family home for example. A recent case highlights that the facts of this type of strategy may be an effective asset protection strategy[1]. In this case the ruling inferred that the parties intended the ‘low risk’ spouse to be the sole beneficially owner of the matrimonial home. However, it also highlights that there may be instances where this strategy can be challenged and may not be 100% effective.
Discretionary trusts may also provide a level of protection as the beneficiaries of the trust have no right to any of the property in the trust. There may be costs involved in transferring ownership of assets to a trust, capital gains tax or stamp duty for example. However, depending on the circumstances these costs may be preferable to personal assets being at risk from business activities.
Operating a company provides a level of separation between an individual and a business however this is subject to directors adhering to their obligation to prevent a company trading while insolvent, among a number of duties[2].
Failure to fulfil these duties could lead to personal assets being at risk for business debts. In the case of dishonesty being a factor in insolvent trading a director may also face criminal charges[3].
Financial agreements (commonly referred to as prenuptial agreements) are a formal strategy to protect assets. These may be entered into before or while you are married.
Financial agreements may also be a strategy to protect gifts to children. Further protection may also be obtained by providing a loan rather than a gift which may be secured with a mortgage. Loan agreements may provide that the loan will be interest-free and repayable only if the property is sold.
These strategies may protect against the risk of a future relationship breakdown resulting in the property being put in the pool of assets to be split between the parties.
Once again there may be circumstances where financial agreements may be overturned if one of the parties to the agreement is a victim of fraud or dishonesty for example.
Who ya gonna call?
There may be a few professional service providers involved in working out the appropriate mix of asset protection strategies for any individual circumstance.
Accountants and lawyers may be needed for different strategies. A financial planner can help discuss the big picture and your individual objectives to help you understand the pros and cons of any strategy or mix of strategies.
Profile Financial Services has experienced advisers that have helped many clients navigate the often-complicated world of asset protection. If this is something that has been on your mind, why not give us a call to discuss your situation and asset protection objectives.
[1] High Court of Australia, Bosanac v Commission of Taxation & ANOR 2022 HCA 34, 12 October 2022, hca-34-2022-10-12.pdf (hcourt.gov.au)
[2] Difference between a sole trader and a company, Difference between a sole trader and a company | business.gov.au.
[3] Insolvency for directors, Insolvency for directors | ASIC.
