What is Asset Protection?
Asset protection is the practice of safeguarding the value of one's assets from potential threats such as legal action, bankruptcy, and financial hardship. Asset protection is the adoption of strategies to guard one's wealth. Asset protection is a component of legal & financial planning intended to protect one's assets from creditor claims.
Individuals and business entities use asset protection techniques to limit creditors' access to certain valuable assets while operating within the bounds of debtor-creditor law. Protecting your assets means putting in place legal strategies that will safeguard your wealth in the unfortunate event of a lawsuit or creditor claims.
In Australia, there are several strategies that individuals and businesses can use to protect their assets, including:
Setting up a trust: A trust is a legal arrangement in which a person (the trustee) holds assets on behalf of another person (the beneficiary). By placing assets in a trust, the owner can protect them from creditors and other potential threats. There are several types of trusts available in Australia, including fixed trusts, discretionary trusts, and unit trusts.
Using a company structure: Incorporating assets into a company structure can offer protection by separating the assets from the individual owner. This can be particularly useful for business owners who want to protect their personal assets from the risks associated with running a business.
Secured debt strategies:
Also known as a gift and loan back arrangement (GLBA). At its core, the GLBA relies on the principles that:
a secured creditor has priority over unsecured creditors; and
asset protection involves separating valuable assets from risk.
A discretionary trust is established.
The amount of equity to be protected by the individual is determined. This involves determining the market value of those assets and subtracting any debt owed on those assets.
The individual then gifts the equity amount to the trust. The date of this gift is recorded formally via a deed of gift which is important for bankruptcy claw back rules.
The trust then loans back the gifted amount to Mary and takes a security over the family home and share portfolio. The loan is documented via a loan agreement and the security is documented by way of:
a mortgage registered on title where the asset is land; and
a security deed creating a security interest over the share portfolio which is then registered on the Personal Property Securities Register (PPSR).
Legacy Protection Solution:
The Legacy Protection Solution relies on the principles that:
a secured creditor has priority over unsecured creditors; and
asset protection involves separating valuable assets from risk.
The steps to implement the Legacy Protection solution are:
The individual 's accountant reviews his/her assets and liabilities and issues a solvency certificate.
A new corporate trustee and new specially drafted Legacy Unit Trust are established.
The individual will be the initial unitholder of the Unit Trust holding a nominal amount of establishment units and will adopt the special role of Capital Guardian.
This trust should never trade or enter into anything risky, and instead should remain a passive investment vehicle holding The individual ’s equity in his personal assets.
The individual applies and subscribes for an amount of units equal to the value of the equity he wishes to protect.
Since the individual does not pay for these units at the time of subscription and issue if the units, he creates a debt to the trust in the amount of the subscription or equity amount.
The debt is recorded with a commercial Loan Agreement and secured by a mortgage over real property and a General Security Agreement which is registered on the PPSR against the individual in favour of the Unit Trust.
The individual can consider appointing joint or alternative Capital Guardians from time to time to bolster the effect of this position and separate himself from the decision making process.
Using self-managed superannuation funds (SMSFs): SMSFs are a popular asset protection strategy in Australia, as they allow individuals to take control of their own superannuation and invest in a wide range of assets, such as property, shares, and cash. SMSFs are regulated by the Australian Taxation Office (ATO) and have strict rules and requirements, but they can offer significant tax benefits and asset protection.
Establishing a family trust:
A family trust is a type of trust that is set up to hold assets for the benefit of a family group. It can be used to protect assets from creditors and potential threats, as well as to manage the distribution of assets to family members.
When you are the beneficiary of a discretionary trust, you don’t own any of the trust’s assets which means your creditors will have a difficult time making a claim on them.
While trusts and other entities can be an effective strategy for asset protection, the finer details can be complex and professional assistance is key.
Using a will: A will is a legal document that outlines how an individual's assets should be distributed after their death. By creating a will, individuals can ensure that their assets are distributed according to their wishes, rather than being subject to the laws of intestacy.
Insuring assets: Insurance is a crucial aspect of asset protection, as it can provide financial protection in the event of loss or damage. There are a wide range of insurance options available in Australia, including home and contents insurance, car insurance, and business insurance.
Overall, the most effective asset protection strategy will depend on an individual's specific circumstances and goals. It is important to seek professional advice from a qualified lawyer or financial advisor when considering asset protection options in Australia.
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For more information, please contact Gavin McInnes on 07 3367 8681 or gmcinnes@grmlaw.com.au.
The information contained in this article is general in nature and cannot be regarded as anything more than general comment. Readers of this article should not act on the basis of this comment without consulting one of GRM LAW 's legal practitioners who will consider their particular circumstances.
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