How to Protect Your Personal Assets

Protecting your personal assets is arguably as important as acquiring them in the first place. All your hard work can be quickly undone if you don’t.

It is important to have effective asset protection strategies in place before something goes wrong. When you do, and where the asset protection strategy is legal, you could effectively prevent a claim against your hard-earned assets by:

  • a creditor,
  • a partner in the event of a future relationship breakdown, or
  • someone who wants to challenge your estate after you die.

There are a range of strategies you can use to protect your personal assets and it is best to work with a trusted adviser to ensure the strategies are tailored to your circumstances and are legally effective. Here we take a high-level walk through some typical strategies.

1. Setting up a family trust

Family trusts are a popular asset protection vehicle. In a worst-case scenario, a family trust may be an effective strategy to protect family assets being seized by a bankruptcy trustee in personal bankruptcy (for example, due to business failure).

In addition to protecting your assets, a family trust can provide tax benefits because the trust can distribute income to family members who are in lower tax brackets.

It is not generally recommended that individuals are trustees of discretionary trusts, particularly if that trust has liabilities, or if it will be giving guarantees to financial institutions, as an example. The reason for this is that if action is taken against the trust, it is the trustee that is liable. The trustee has a right of indemnity, that is, it can use the trust’s assets to pay the claim, however if the claim is greater than the value of the assets, then  the individual trustee’s assets could be exposed.

If the trust does not have debt or is a trading business, the director could be the high-risk spouse (who usually should have no or limited assets in their name) and the shareholding should be in the name of the low-risk spouse.

It is important to note that a family trust could still be attacked in a bankruptcy scenario if for example, a transaction is determined to be a voidable by a bankruptcy trustee. You should seek professional advice to set up a family trust and confirm this is the best asset protection strategy for you.

2. Ensuring assets are owned by a low-risk spouse

Ideally, assets should be owned by a low-risk spouse or another entity not controlled by the high risk spouse. If structured correctly, this could make it more difficult for a trustee in bankruptcy or a liquidator to gain control of those assets. For example, when buying a family home or investment property, structuring the purchase so that the low-risk spouse is the borrower, may make it more difficult for the property to be in the control of a trustee in bankruptcy.

3. Setting up a company

An alternative to setting up a family trust if you are running a business is to choose a company structure. If you do, your assets will have greater protection than if you choose a sole trader or partnership structure. In a company structure, your personal assets could be protected from creditor claims.

A company is a separate legal entity. It can be sued for outstanding debts. There can also be tax benefits to setting up a company if you are in a high marginal tax bracket. These benefits need to outweigh the costs of setting up the company.

As with setting up a family trust, you should seek professional advice to set up a company. There are specific legal requirements for setting up and registering a company in Australia. In addition, there are ongoing legal compliance requirements.

4. Having appropriate insurance coverage in place

It is important to have appropriate insurance coverage to protect your assets. That protection includes covering you for any outstanding debts on your assets or ensuring your future income. Examples of insurance cover that can help you to protect your assets include

  • income protection insurance,
  • life insurance,
  • total and permanent disablement insurance, and
  • trauma insurance.

You should also regularly review your level of insurance cover to make sure it continues to be appropriate for your needs. Your circumstances will inevitably change over time. 

The bottom line

Asset protection is a crucial aspect of financial planning. Unfortunately, it’s also often a neglected aspect because many people focus solely on acquiring assets instead.

How we can help

Our experienced financial advisors at Wilson Pateras in Richmond can help you with asset protection strategies. We’ll take the the time to understand your individual circumstances and financial goals before providing you with appropriate advice.  We can also work with your legal advisors or recommend a good lawyer to make sure any asset protection strategy is legally effective.

Contact us today for a complimentary, obligation-free consultation to find out how we can help you!

This article contains general advice only. It does not take into account your or your business objectives, financial situation or needs. You should seek advice from a financial planner, accountant or other professional adviser before making any financial decision based on this information. Liability limited by a scheme approved under Professional Standards Legislation, other than for the acts or omissions of financial services licensees.

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