Owning a business or undertaking investment activities can put your personal assets at risk. How you plan for and manage that risk can mean the difference between losing everything or keeping your assets.
Asset protection is a process of undertaking proactive planning and implementing strategic techniques to protect your personal assets if things go bad. That is, separating risk from wealth.
Alman Partners offers asset protection services to help our clients separate their wealth from risk.
Choice of Structure
There are various legal structures that can be used for owning a business and/or investments, including:
- Sole trader
Running a business as a sole trader or partnership provides no protection – if a claim is made, all your assets will be exposed and you stand to lose everything. From an asset protection perspective, companies and trusts are much safer options.
A company is considered a separate legal ‘person’. This means the company can run a business, own investments, and be sued. The owners of the company (the shareholders or members) are generally not exposed to any claims made against the company (they only have to contribute any unpaid amount on their shares – which are usually worth a minimal sum, like $1).
However, acting as a director of a company increases the risks for the individuals. Directors can be personally liable if:
They continue to allow the company to trade while insolvent (unable to pay its debts when due)
They sign personal guarantees for the obligations of the company – this puts a director’s personal assets on the line
For workplace health and safety breaches
For unpaid PAYG withholding amounts and superannuation guarantee entitlements
If the director has been personally negligent in undertaking any business activity on behalf of the company, someone who has suffered injury or loss from that negligence may be able to claim damages against the director personally.
From an asset protection perspective, it’s unwise to have all owners of the business listed as directors, as this exposes them all to personal risk. Instead, companies should consider only having a minimal number of directors and empowering shareholders with additional rights and management tools. It’s also possible to limit a director’s decision making-rights through a Shareholders’ Agreement.
Trusts are also very useful as an asset protection vehicle. A trust is a relationship, where the trustee holds assets on behalf of a group of beneficiaries. If a claim is made, while the trustee can be personally liable, the beneficiaries will not.
Strategic Ownership of Assets
Whomever the name assets are held in makes no difference in a relationship breakdown – they will still be part of the matrimonial pool that gets divided between parties. However, ownership matters if creditors make a claim against either the husband or wife.
For example, if the husband was the director of a company, ideally he would own no assets in his name. All assets would be owned by his wife (or another trusted party or entity).
Of course, this needs to be balanced against taxation implications of who owns the assets. Due to stamp duty and capital gains tax implications of transferring properties, it’s not always viable to structure a client’s affairs to have all properties held in one person’s name.
Similarly, risky ventures, such as trading a business, should be kept separate from wealth. We often recommend clients have a trading company to run their business and a separate holding company. These types of arrangements now also need to be registered on the Personal Property Securities Register to be enforceable.
Superannuation is generally not available to be divided among creditors if an individual goes bankrupt. Accordingly, having money and assets in superannuation is a good asset protection strategy.
However, if you dump $1 million into super the day before you go bankrupt, this won’t work and will likely be clawed back. However, establishing a pattern of making regular superannuation contributions will ensure your money is safe.
Of course, having insurance to cover for claims, such as negligence, is an essential asset protection tool. This is the first line of defence.
When it’s too costly (through stamp duty and CGT) to transfer all wealth to a non-at-risk party’s/entity’s ownership, a gift/loan strategy can be used to move equity.
Are you are risk?
Here is a simple checklist to help you determine if your assets are exposed:
- Are you in business? Do you have investments? 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?
- Have you obtained advice on the best structure for your business/investments and personal assets? This 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 a 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 repayments if an unexpected event occurred, like 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?
- 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 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 enjoy a strong collaborative relationship with Alman Partners, providing significant benefits for our mutual clients.
The above information is of a general nature only and should not be acted on without seeking legal advice on your specific situation.
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.