You work hard your whole life to build up your wealth…so why would you knowingly put it at risk? No one wants to see the fruits of their labour taken by creditors through a failed speculative investment, business venture or accident. Yet most people leave themselves exposed!
There are measures you can put in place to isolate and protect your assets though careful and skilful structuring and insurances. This is called “asset protection”. Put simply, it is all about separating risk from wealth.
How you structure your affairs whilst the ‘sun is shining’ can make a huge difference if a storm hits. If you think about it, we prepare for weather events – stock up on water, tape windows, buy non-perishable food and lock up animals. Yet, most of us do not take precautions with our money and assets so that they will not be at risk if an unforseen event was to occur!
Joe and Kerri are at risk of losing everything. From a legal point of view what are the key issues that could have saved their business and livelihood?
- Choice of structure – rather than owning the business as a sole trader (which provides no protection and exposes all your personal assets), ownership through a company or trust structure (or combination);
- Separating business assets from the trading risk through, for example, a trading company and separate asset holding company;
- Being able to show a pattern of regular superannuation contributions. Superannuation is generally not available to creditors if an individual goes bankrupt;
- Having personal assets owned by a non-at-risk party – for example, Joe’s wife owning all the assets in the relationship;
- Having insurances such as public liability, professional indemnity, income protection, life and TPD insurances – this is a 1st line of defence;
- Gift/loan strategy – to move equity (if too costly to transfer assets, this allows equity to be ‘moved’ without triggering CGT or stamp duty implications).
Are you are risk?
Here is a simple checklist to help you tell if your assets are exposed:
- Are you in business? Do you have investments? à have you structured your affairs to isolate your wealth from risk?…or do you own everything and run everything in your own name or from the one entity?;
- Are you structured correctly? Have you obtained advice on the best structure for your business/investments and personal assets – such as companies, trusts or a combination? This also includes ensuring there are provisions in the trust to deal with bankruptcy, such as carefully considering who should hold the role of trustee and appointor.
- If you are a company director – are you assets personally owned? (Note above risks to directors)
- Have you (as director/shareholder) provided any personal guarantees for business/investment debts or liabilities in favour of creditors?
- How heavily geared are you? – could you continue to meet the repayments if an unexpected event occurred, like a tenant moving out of an investment property and you receiving no rental income for a period of time;
- Do you own all your assets/investments in your own name?…or yours and your wives’ names?
- Do all dealings between your related entities have enforceable security. For example, if a holding entity is hiring equipment to a trading entity – has the transaction been registered properly on the Personal Property Securities Register as a “Purchase Money Security Interest”.
- Have any related party loans to the business/investment vehicle been documented in writing and hold appropriate security?
- Have you safeguarded your business against death, incapacity and relationship breakdown;
- Do you make regular superannuation contributions?
- Have you sought legal advice from a practitioner that specialises in asset protection?
- Is there more than 1 director of your company – this could be unnecessarily exposing the personal assets of multiple directors;
- Do you have a partnership/shareholders’ agreement?
Need help safeguarding your assets? McKays Solicitors have enjoyed a strong collaborative relationship with Alman Partners, which has provided significant benefits for our mutual clients.
- Suzanne Brown, Principal at McKays Solicitors and Queensland Law Society, Business Law Accredited Specialist. The above information is of a general nature only and should not be acted on without seeking legal advice on your specific situation.