Risky Assets: A Case Study

Are Your Assets at Risk?

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 investment, business venture or accident. Yet many people leave themselves exposed.

If you go broke or are pursued by creditors, then your house could be up for grabs. This goes for any assets you own, including shares, monies in bank accounts and managed funds. This is why it’s so important to use asset protection services. There are measures you can put in place to isolate and protect your assets. These asset protection measures help separate your wealth from risk.

How you structure your finances while the sun is shining can make a huge difference if a storm hits. We prepare for weather events by stocking up on water and taping windows, yet most of us don’t take precautions with our money and assets.

Joe’s Story

Over the years Joe’s business has done well. He has continued to expand the business (as a sole trader) through loans secured against his business. He and his wife Kerri’s lifestyle has also improved with their growing income. Fast-forward 5 years.

Unfortunately, with Mackay’s economic downturn, their business income has reduced significantly. They’re in a cash flow free-fall and have defaulted on their business loans.

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), consider ownership through a company or trust structure (or combination).

Separating business assets from trading risk through a trading company and separate asset holding company.

Making 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 could take ownership of all the assets.

Having insurances such as public liability, professional indemnity, income protection, life and TPD insurances – this is a first line of defense.

Using a gift/loan strategy to move equity (this allows equity to be moved without triggering CGT or stamp duty implications.

Are You At Risk?

Here is a simple asset protection checklist to help you identify risk:

  • Are you in business? Do you have investments? Have you structured your affairs to isolate your wealth from risk? Or do you run everything in your own name or from one entity?
  • 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.
  • If you’re a company director, are your assets personally owned?
  • 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, such as a tenant moving out of an investment property?
  • Do you own all your assets/investments in your own name?
  • Do all dealings between your related entities have enforceable security? For example, if you’re a holding entity hiring equipment to a trading entity – has the transaction been registered on the Personal Property Securities Register?
  • Have all loans to the business/investment vehicle been documented in writing?
  • Have you safeguarded your business against death, incapacity and relationship breakdowns?
  • Do you make regular superannuation contributions?
  • Have you sought legal advice from a practitioner that specialises in asset protection?
  • Is there more than one 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.