You’ve heard of “Risky Business” – well it isn’t just a movie that Tom Cruise stars in… unfortunately, owning a business or undertaking investment activities can put your personal assets at risk. How you plan for and manage that risk though, can mean the difference between losing everything or keeping your assets.
Asset protection is a process of undertaking pro-active planning and implementing strategic techniques to protect your personal assets if things go bad. That is, separating risk from wealth.
Choice of Structure
There are various legal structures that can be used for owning a business and/or investments. These include as a sole trader, partnership, company, trust, through superannuation or a combination of those.
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 a separate legal ‘person’. This means that the actual 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 whilst insolvent (unable to pay its debts when due);
- they sign personal guarantees, guaranteeing the obligations of the company – this will put all the directors’ 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 then someone who has suffered injury or loss from that negligence may be able to commence an action for damages against the director personally.
Accordingly, from an asset protection perspective, it is actually unwise to have all owners of the business as directors, as this exposes them all to personal risk. Instead, companies should consider only having a minimal number of directors and empowering the shareholders with additional rights and management tools and/or limiting the 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, whilst the trustee can be personally liable, the beneficiaries will not. The risk to the trustee can be mitigated by, for example, having a company act as trustee of the trust.
Strategic Ownership of Assets
If hubby is the director of a company, which runs a business, then ideally he would own no assets in his name and all assets would be owned by the wife (or another trusted party or entity).
Whose 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 the parties. However, it can assist if a claim is made by creditors against hubby.
Of course, this needs to be balanced against taxation implications of who owns the assets. Further, sometimes, due to the stamp duty and capital gains tax implications of transferring properties, it is not viable to structure a client’s affairs so as to have all properties held in 1 person’s name.
Similarly, in separating risk from wealth, ‘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’ which owns, for example, the plant and equipment and hires it to the ‘trading 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 amongst creditors if an individual goes bankrupt. Accordingly, having money and assets in superannuation is good asset protection strategy.
However, if the day before you go bankrupt, you dump $1 million into super, this is not going to work and will likely be ‘clawed back’. However, establishing a pattern of making regular superannuation contributions can ensure monies you contribute to superannuation are safe and unable to be attacked.
Of course, having insurance to cover for claims, such as negligence, is an essential asset protection tool. This is the first line of defence.
Where it is too costly (through stamp duty and CGT) to transfer assets to achieve all ‘wealth’ in the 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 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.