4 Ways to Protect Yourself Financially
Protecting your personal assets is arguably as important as acquiring them in the first place. All your hard work can be quickly undone without proper protection.
It is important to establish ways to protect yourself financially and implement these strategies before something goes wrong. This could effectively prevent a claim against your hard-earned assets by:
- a creditor
- a partner in the event of a future relationship breakdown
- someone who wants to challenge your estate after you die
There are a range of ways to protect yourself financially. It is best to work with a trusted adviser to ensure the strategies are tailored to your circumstances and are legally effective. At Wilson Pateras, we recommend considering protecting your assets in the following ways:
1. Setting up a family trust
Family trusts are a popular way to protect yourself (and those close to you) financially. 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 by distributing 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, for example. The reason for this is that if action is taken against the trust, the trustee can be liable. The trustee would normally have a right of indemnity in most circumstances (meaning they 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, a very undesirable outcome.
If the trust does not have debt or is a trading business, the director could be the spouse with more personal risk (who usually should have limited assets in their name). In this scenario, the shares should be held 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 avoidable by a bankruptcy trustee. You should seek professional advice including legal advice to set up a family trust and confirm this is the correct way to protect yourself financially.
2. Ensure assets are owned by the spouse with less personal risk
Ideally, assets should be owned by a low-risk spouse or another entity not controlled by the higher-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
If you are running a business, an alternative to setting up a family trust is to choose a company structure. Doing this can provide greater protection for your assets than if you choose a sole trader or partnership structure.
A company is a separate legal entity to its directors and owners. Companies still remain liable to be sued and must settle outstanding debts. However, the personal assets of their directors and owners are usually protected from creditor claims by the ‘corporate veil’ of the company’s legal status. You should seek professional advice as to whether your assets could be protected in this way.
There can also be tax benefits to setting up a company if you are in a high marginal tax bracket. Of course, these benefits need to outweigh the costs of setting up the company.
As with setting up a family trust, you should seek professional advice in the process of setting 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. Ensure you have 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. Some ways to protect yourself and your family financially with adequate insurance cover include:
- income protection insurance
- life insurance,
- total and permanent disablement insurance
- 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, many people neglect this aspect when they focus solely on acquiring assets instead. At Wilson Pateras, we can help you strategise and implement multiple ways to protect yourself financially, for full peace of mind.
Our experienced financial advisers take the time to understand your individual circumstances and financial goals before providing you with appropriate tailored advice. We can also work alongside your legal advisers to ensure any asset protection strategy is legally effective.
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.