We’ve all heard Benjamin Franklin’s famous adage: ‘failing to prepare is preparing to fail‘; asset protection is no exception.
There are two common misconceptions that people have about asset protection. First, that only the exorbitantly wealthy need asset protection. Second, that only people who engage in risky business transactions should be concerned with protecting their assets.
Both misconceptions are categorically untrue.
The truth is that any business can fail, any individual can be bankrupted, and anyone can be sued. In fact, according to the AFSA, 417 people entered personal insolvency between 23 August and 5 September alone. One would hope that these individuals had the foresight to protect their assets.
What is asset protection?
Put simply; asset protection is the process of protecting one’s assets from lawsuits, creditor claims or other unexpected events. There are many strategies to protect your assets.
Strategy 1: Acquiring Assets
The first strategy is to avoid acquiring the asset in the first place and instead have someone else acquire the asset. Practically, this means that creditors may have difficulty accessing assets not registered in your name.
However, this strategy has its limitations, including Bankruptcy Laws allowing debtors to access assets you have helped someone else acquire.
Strategy 2: Transferring Assets
Similarly, to avoid creditor claims, assets can be transferred to someone else. Although simple in theory, this strategy does present risks.
The most salient risk is that the individual to whom you have transferred your asset either disappears with the asset or loses the asset.
Note that this strategy is also limited by creditor ‘claw back’ provisions in Insolvency and Bankruptcy Laws.
Strategy 3: Establishing a Trust
This is among the most popular asset protection strategies. A trust is a legally recognised relationship between the trustee and the trust’s beneficiaries. There are several types of trusts, each with its own benefits and respective weaknesses.
Discretionary trusts are a popular trust type, favoured for their flexibility. Under this arrangement, assets are protected from creditor claims that the trustee, not the beneficiary, legally owns the asset.
Whilst this seems like a perfect solution, there are two essential things to consider. First, the beneficiary no longer has legal ownership, and this rests with the trustee. Second, transferring assets into a trust may result in considerable stamp duty costs and capital gains tax.
Strategy 4: Restructuring
Having your business registered in your name carries several risks, including being personally liable for financial or tax-related debts. This also means that creditors can use their personal assets to settle the debt.
One strategy to avoid this is to structure your business as a company. However, this carries its own set of legal obligations.
Asset protection is one of those things that you don’t need until you actually need it. Although your assets may not currently be at risk, the COVID-19 pandemic has revealed that the future is incredibly unpredictable, and things can change dramatically overnight. Therefore, have the foresight to think ahead and plan for the future. You’ll be glad you did.
**Assisted by: Kayla Cook**