Asset Protection Stratgies

Personal insolvencies across Australia have increased in the June quarter 2023, according to new statistics released today by the Australian Financial Security Authority (AFSA). There were 2,705 new personal insolvencies in the 3-month period to June 2023 – up from 2,301 in June 2022. Among these individuals, those who had asset protection strategies in place will be the ones to weather the financial storm following bankruptcy. They will be able to stand on their own two feet again and comfortably support their families until they transition to more successful endeavours in their lives.

There are several common misconceptions about asset protection. One is that it’s only necessary for the exceptionally wealthy. Another is that it’s primarily for professionals with high liability, such as doctors or legal practitioners. Lastly, there’s the belief that it only applies to those involved in risky business transactions. These misunderstandings overlook the broader relevance and importance of asset protection for a wide range of individuals and scenarios.

In this asset protection series, the first part, titled “Why You Should Care About Asset Protection,” covered everything you need to know about safeguarding your assets. In this article, we will discuss implementing various strategies to protect your hard-earned assets.

Strategies for Asset Protection 

There are several ways to protect your wealth and ensure peace of mind when accumulating assets. Below, we discuss some common strategies:

Insurance

Getting the right insurance for your assets is a smart and affordable way to cover your back, whether it’s for your personal stash, your investment portfolio, or your business hustle. It’s like having a safety net so you can sleep easy at night, knowing you’re covered if things go south. And if you’re not sure where to start, a chat with an insurance broker can set you on the right path. They’re like the savvy guides in the world of insurance, helping you figure out exactly what you need to keep your hard-earned assets safe and sound.

When it comes to personal or investment assets, common insurance types include:

• Home and Contents Insurance: Protects your home and the belongings within from various risks.

• Landlord’s Insurance: Essential for property owners renting out their properties, covering property damage and liability.

• Car Insurance: Provides coverage for your vehicle against accidents, theft, and other damages.

For businesses, insurance is not just advisable; it’s often essential. Key business insurance types are:

• Public Liability Insurance: This covers legal liabilities for injury or property damage to third parties.

• Professional Indemnity Insurance: Offers protection against claims of negligence or breach of duty made by clients.

• Workers’ Compensation: A mandatory insurance in many regions, it covers employees for work-related injuries or illnesses, including medical expenses and wage replacements.

• Cyber Insurance: Cybersecurity insurance is designed to protect businesses from the financial fallout of cyber incidents, including data breaches, cyberattacks, and other security threats. It can cover a range of expenses such as business interruption losses, costs for repairing and restoring IT systems, legal and PR expenses, fines and penalties, as well as losses from scams, fraud, and phishing. Cyber insurance policies also often provide incident response services and coverage for extortion payments, which can be crucial in the immediate aftermath of a cyber incident. 

Each type of insurance plays a critical role in a comprehensive asset protection strategy, mitigating financial risks and providing peace of mind in the face of unforeseen events.

Acquire Asset in the Low-Risk Spouse Name

Acquiring assets in the name of a low-risk spouse is a common strategy for protecting wealth from potential creditors and financial risks. This approach involves distinguishing between the “low risk” spouse, who may have minimal exposure to financial liabilities, and the “at-risk” spouse, who might be more exposed due to business activities or professional liabilities. By placing assets such as the family home in the name of the low-risk spouse, these assets are shielded from the creditors of the at-risk spouse, potentially providing a layer of financial security and tax advantages, particularly if there’s a significant income disparity between the spouses.

However, it’s essential to be aware that this strategy is not foolproof. Legal ownership transferred to the low-risk spouse might not always protect assets from creditors if the at-risk spouse is considered a beneficial owner under the law of equity. This is due to the presumption of resulting trust, which may apply when one spouse contributes financially to an asset registered in the other spouse’s name, without clear evidence of a gift intention. In such cases, creditors may still pursue claims against the asset.

Given these complexities, it’s crucial to consult with professionals for tailored advice on asset protection strategies, ensuring they align with legal requirements and effectively safeguard assets.

Good, Bad and Ugly – Company Structure & Asset Protection  

Good – When starting a business, many people choose to operate as sole traders or in partnerships because it’s easy and doesn’t cost much. But this simplicity comes with a big risk: if the business gets into debt or legal trouble, the owner’s personal things like their house, car, and savings could be used to pay off business debts. However, setting up your business as a company has many benefits, including protecting your assets. 

Under the law, a company is a separate legal entity capable of entering into contracts and incurring liabilities, such as debt. The company itself is obligated to perform those contracts and meet those liabilities, not the shareholders or the directors in their personal capacity.  

As a result, should a successful claim be made against your business and your business cannot meet the monetary requirements of that claim, your creditors will only have recourse against the business and the business assets, not your personal assets. 

Bad and Ugly – It’s a common misconception to think that just because you run your business through a company, your personal assets are safe from creditors or the bankruptcy court. Most of the time, when people set up a company, they’re thinking about tax savings, how easy it is to set up, and because everyone they know has a company, so it seems like a no-brainer. They don’t always stop to consider what happens if things go south, someone in charge hits financial rock bottom and has a personal guarantee.

Here’s the thing: if someone goes bankrupt, the person in charge of sorting out their finances (that’s the bankruptcy trustee) could end up calling the shots in the company. Imagine this person suddenly getting the power to sell off company assets and use the money as they see fit. Not a great picture, right?

That’s why it’s important to think about asset protection when you’re setting up your company. You need a game plan for the worst-case scenario, like bankruptcy, and you’ve got to be smart about who you let own shares and who’s in the driver’s seat. It’s all about making sure your company isn’t just good for tax reasons but also a safe house for your assets.

Using Trust Structures to Protect Your Assets

After reading the above, you might be thinking, “Oh no, I’m running my business through a company and paid a significant amount to establish this business structure.” However, you can shift the dynamics of your asset protection strategy by incorporating a trust structure. Trusts can be utilized to hold both your personal and business assets; however, it’s important to understand that trusts, by law, cannot directly own assets. Since a trust cannot legally own assets, it requires an entity to manage the assets for the benefit of the beneficiaries.

Trusts can be overseen by an individual, but this individual does not hold ownership of the trust’s assets. This distinction is crucial because, in the event that you are sued, the assets within the trust are generally considered off-limits, as the ownership does not reside with you personally. This separation provides an added layer of protection, ensuring that trust assets are shielded from personal legal liabilities.

There are various types of trust structures, each with its unique characteristics and benefits, which, when utilised correctly, can offer robust protection for your assets. These include:

1. Discretionary Trust: Often used by families, this trust allows the trustee to have the discretion to distribute income and capital among the beneficiaries as they see fit. Australians also refer to this trust as a family trust.

2. Unit Trust: In this structure, beneficiaries hold units similar to shares, which dictate their proportion of income and capital from the trust.

3. Hybrid Trust: Combining elements of both discretionary and unit trusts, hybrid trusts offer flexibility in the distribution of assets and income.

4. Testamentary Trust: This type is established as per a will to provide a benefit to the beneficiaries after the death of the will maker. Please feel free to read our Testamentary Trust articles for a better understanding of this trust’s benefits.

Indeed, setting up a trust structure can be costly, but the advantages they provide in terms of asset protection and potential tax efficiencies can significantly outweigh these initial expenses. When integrated into your long-term investment and estate planning strategies, trusts can not only safeguard your assets from legal threats but also optimise your financial legacy for future generations. The strategic use of trusts can thus be a wise investment, contributing to both the security and growth of your financial portfolio over time.

In conclusion, starting your investment journey, whether as an employee or a business owner, requires careful consideration of two critical aspects: tax planning and asset protection. These are not just checkboxes on a list; they are foundational pillars that seasoned investors prioritise from the outset. The goal is not merely to accumulate assets but to do so in a way that ensures their longevity and protection. 

As we’ve explored various avenues from insurance to trust structures, the journey toward securing your financial future can appear daunting, yet it is essential. Each individual’s circumstances are as unique as their financial goals, and while the strategies discussed provide a foundation, the nuances of personal financial situations demand bespoke solutions. Imagine working hard to acquire your second or third asset, only to realise that you’ve overlooked the safety nets essential for safeguarding your investments. This scenario is far from ideal and highlights why it’s crucial to think about asset protection right from the start. It’s not something to be deferred or treated as an afterthought.

Should you find yourself seeking guidance or wishing to delve deeper into your strategic options, we at Investax stand ready to assist. Our team of dedicated professionals is committed to guiding you through the complexities of asset protection, tailoring strategies that align with your specific needs and aspirations. We understand that the first step is often the hardest. That’s why we invite you to reach out and begin a conversation with us. Let’s explore your financial journey together, identify potential vulnerabilities, and craft a robust asset protection plan that not only secures your hard-earned assets but also paves the way for a prosperous future.

Pro Tips: 

Begin Early: It’s crucial to establish a roadmap for your investment journey early on. While asset protection might not seem necessary at the outset, understanding its importance and mechanisms from the start is invaluable. This foresight ensures you’re well-prepared for the future, no matter how your financial landscape evolves.

Business Ownership Framework: It’s advisable to consider structuring your trading company’s ownership through a trust or holding company. This approach not only fortifies your asset protection strategy but also unveils significant opportunities for tax planning, offering a dual advantage.

Investment Ownership Strategies: Consider appointing a trusted, low-risk de-facto partner as the owner of your properties and investments. Additionally, explore establishing a trust structure, in consultation with your accountants and trust lawyers, to mitigate the risks associated with individual ownership.

Always Consult with Experts – When it comes to navigating the complex waters of asset protection and tax planning, the advice of a seasoned accountant and tax lawyers is invaluable. If your current accountant lacks expertise in these specific areas, don’t hesitate to seek out specialists like Investax.

Reference

https://www.afsa.gov.au/newsroom/personal-insolvencies-june-quarter-2023