How to effectively protect your assets
It can take a lifetime to grow your wealth and asset base, but only a moment in time for it to be lost and taken away. Effective Asset Protection is the use of smart, legal strategies to protect your assets. Most people have insurance to protect against risk, but no insurance can cover every possible scenario, and you may not know which insurances are needed to protect against the unique risks you face.
Think asset protection doesn’t apply to you? Think again. If you have assets in your name, you could be at risk. There is no surprise that protecting assets against frivolous creditors and lawsuits is increasingly becoming a common concern. To avoid significant losses, it is important to have reliable and effective asset protection strategies so you can continue to grow your wealth and achieve your financial objectives.
COMMON ASSET PROTECTION QUESTIONS
- What are the safest asset protection strategies?
- What is the risk without having asset protection strategies in place?
- What is a testamentary trust?
- How can a testamentary trust be utilised to minimise tax?
- Do I still need asset protection if I have insurance?
What’s the best approach to protecting your assets?
Many Australians who have built up their entire wealth and property portfolio in their personal names are especially vulnerable to losing their assets. Assets owned in personal names can be better protected without triggering taxes if you get asset protection advice.
There are several myths and mistakes regarding asset protection – in particular, owning assets in individual names, the use of company ownership and the improper use of certain types of trusts in the absence of sound tax planning and estate planning advice. The best way to protect your assets is to be aware of the all the tax and legal ramifications of using particular types of property investment trusts and structures and ensure you get personal tax advice from an asset protection specialist with regards to your investment portfolio and wealth creation plan.
1. Using Trusts to protect your assets
Trusts are one of the more beneficial asset protection strategies as the person does not legally own the assets – the assets are owned by the trust – therefore the asset is not theirs to lose in the event that they get sued. The trust is controlled by the individual but they have no ownership of the assets inside the trust. In fact, the use of trusts can be traced back to ancient Rome.
Types of Trusts which provide varying degree of asset protection include:
- Discretionary Trusts
- Unit Trusts
- Hybrid Trusts
- Family Trusts
- Testamentary Trusts
In general, trusts offer reliable asset protection, but some fail to provide the flexibility and tax advantages that property investors can be entitled to. For example, the use of a discretionary trust does provide asset protection as well as the ability to claim the 50% CGT General Discount, however discretionary trusts does not allow any tax credits to the individual for negatively geared assets. Land tax is also a concern in that NSW does not receive the land tax threshold and Victoria only receives a relatively small threshold.
In the absence of property specialist asset protection advice, many people build up their wealth in their own names- leaving them exposed to high risk of losing assets. With changing views on asset protection and estate planning, many people are now looking at how they own assets and are looking for better asset protection strategies.
2. How do I now protect my investment property / assets which have been purchased in an individual or company name?
A simple solution is to sell those assets to a trust, but that is not without a substantial cost. When you sell assets, you pay tax on the profits and you would also need to pay stamp duty, which again is substantial on property. You may also need to refinance if you have debt as the “legal owner” of the asset changes and if the finance market is tight this refinancing may not be easily completed.
As Australia’s leading property specialist accounting and wealth advisory group, Chan & Naylor has developed a number of asset protection strategies and structures to benefit our clients. These range from simple protection strategies for assets which are low in number or value (i.e. the family home and one investment property), to more complex solutions for larger asset bases where an individual wants both asset protection, estate planning and the ability to redirect who receives distributions.
Chan & Naylor trusts and structures are developed with long term property investing in mind. That is why our trusts have been built to last…literally! Our trusts have no vesting date (traditional/generic trusts expire after a usual 80 year period, after which huge tax events are triggered such as CGT and potentially stamp duty on all the assets held in the trust).
Our trusts also have strong lineage clauses built into them which means that your assets will only go to blood relatives and not be up for grabs in the family court if your children gets divorced from their spouse. Effectively, your Chan & Naylor structure will enable you and your family to grow, protect and safely pass down wealth from generation to generation.
Below are four examples of how we can help you improve asset protection that does not trigger capital gains tax and in most cases does not trigger any stamp duty on the underlying assets.
Care must be taken in the drafting and execution of these strategies and in particular the relevant claw back provisions of the bankruptcy legislation which would require a four year waiting period from the commencement of the strategy until asset protection is fully available. This time period is the window in which a receiver in bankruptcy can go back to unravel any strategy. Appropriate documentation should also be prepared and executed showing solvency statements and the confirmation that there are no potential litigations pending. The cost of the various strategies must also be considered against the benefits.
Unfortunately, many property investors stand at a major disadvantage when it comes to asset protection. Why?
Firstly, while property is a great vehicle to hold and grow wealth, it’s also among the most cumbersome of assets. Unlike shares or cash, property cannot be easily sold or traded in and out of in case of a crisis. As we know, there are also invisible costs like stamp duty, legal fees and other expenses due at purchase or sale time.
Secondly, and most importantly from an asset protection perspective, the ownership of a property is extremely easy to establish. Australia has a ‘Torrens Title’ system of property registration where every single piece of land, or real estate, has a number and is registered in each state with the relevant land titles office. Anyone claiming an interest in a piece of land has to register their interest on its title for it to be recognized. This is why banks will register their mortgage on your title. When the property is sold, all debts on the title must be discharged.
This creates a problem for asset protection. Everyone from property investors to mum-and-dad home owners typically tends to hold the title of the properties they own in their own names. This means that their significant equity in property (the part that they own, free of the mortgage to the bank) is totally exposed to creditors in times of crisis. Anyone pursuing the property owner can try to seize their wealth by registering a caveat on the title to the property they own.
There are many different opinions about asset protection and different approaches to protecting assets. But there are prevailing myths and dangerous fallacies about asset protection that have led many people to believe that their assets are adequately protected. You need to be aware that there are many factors that will impact on your asset protection strategy.
INVESTMENTS OWNED IN INDIVIDUAL NAMES
For starters, property investors that own investment properties in their personal name have virtually no asset protection. This is the biggest mistake of them all. If you were to be sued by an unsecured creditor, subject to a falling out in a business partnership, or sued by an injured tenant or disgruntled employee, customer, etc. – you could potentially lose all assets held in your own name. Some people argue the tax benefits for owning property in an individual name. But what do those tax benefits count for, when you are at risk of losing it all?
Many people think that by just buying an investment property or assets in their spouse’s name or de-facto partner’s name, would naturally give them adequate asset protection. This is not a reliable and effective asset protection strategy. In certain circumstances, many litigators and creditors have the power through the courts to lay claim to assets held under spousal or de-facto partner names. Furthermore, if you were subject to a family law court as a result of a bitter family dispute or relationship breakdown, you could potentially lose control over all assets. Who would want the in-laws to get control over your wealth? If you are seriously concerned about asset protection, you should avoid having assets like investment properties owned in any individual’s name.
INVESTMENTS OWNED IN A COMPANY STRUCTURE
PROPERTY INVESTMENTS OWNED IN A GENERIC TRUST
However, there is no one size fits all when it comes to Trusts and their specific uses. Some Trusts are great for one particular use as they provide certain advantages over others, but in the end fail to truly provide tax effective asset protection. This is particularly true for property investors. If you want your property assets to be protected in a tax effective and investment vehicle, then you need to consider a property specific trust. A trust that is designed specifically for property investors. Likewise, for business owners operating a business and controlling assets, a business specific trust is recommended.
At Chan & Naylor Melbourne, we found that property investors could benefit even more from their investing if they had an optimal tax environment in which to safely control their assets. For instance, there are certain tax benefits that property investors would not be able to reliably claim if they are using the wrong trust. One such example of a tax benefit, is the negative gearing tax benefit.
A major disadvantage that many Trusts and Structures have is the fact that they don’t have the adequate asset protection measures to protect wealth within the family (of blood relation only). Ask yourself this question: what would likely happen to the inheritance you leave your children, if they are subject to family breakdown or get personally sued, etc? Do you really want your hard earned wealth lost within the next generation, or potentially allow current or future unscrupulous in-laws from getting control of your family estate?
When buying assets, such as property in a Trust, it is important that the investment vehicle you use, that it would give you reliable asset protection for future generations and protect assets within the family.
For property investors and business owners, Chan & Naylor Melbourne’s asset protection specialists has developed and built specific lineage clauses into property specific and business specific trusts, that stipulates only the relatives (of blood relation only) of the original trustees are eligible beneficiaries or future appointment as trustees. This means, that with the asset protection specialists at Chan & Naylor Melbourne, you can rest assured knowing that only your lineage (not your in-laws) are the only ones entitled to benefit from your accumulated wealth.
Another major disadvantage that many people don’t realise they get when they use a typical Trust or Structure, is the fact all trusts expire after 80 years. Many Trusts have a use by date (called a ‘Vesting Date’) and many people are dangerously unaware of this fact.
When a typical Trust expires it would automatically pass the assets down to the nominated beneficiaries. In such an event, the transfer of assets would trigger Capital Gains Tax and Stamp Duty. This is a nightmare for long term property investors. Just think about the huge tax bill you will leave the next generation, in terms of capital gains and stamp duty. They will be forced to pay those enormous taxes just to retain the accumulated wealth within the family estate.
So how can you shield yourself from such dangers? Here are four basic asset protection strategies in Sydney, Brisbane, Melbourne, Perth and Adelaide residents can apply.
4. Basic Asset Protection
Umbrella liability insurance can be bought from home and auto insurance providers and gives you added protection against personal-injury claims. When buying an umbrella policy, take note of the inclusions and make sure that you are protected from all types of claims. If you are to come upon an inheritance, it’s best to do this ahead of time and make sure that your coverage amounts to a value that is at least equal to your net-worth.
Consider separate accounts
Some would advise transferring assets to your spouse’s name to keep them safe, but this can have the opposite effect should you end up in divorce. The wiser choice, in this case, would be to have separate accounts. This ensures that your assets stay with you and your next of kin despite a divorce.
The same goes for joint accounts with business partners or other connections. These can be at risk should the joint owner incur a tax lien or lawsuit judgment. But if it is absolutely necessary to have a joint account, at least keep the balance to a minimum.
Create a business entity
If you own a small business or rental property make sure to create a formal business structure (Pty. Ltd. or Propriety Limited Company). By forming this entity, your personal assets are protected against business lawsuits, which can now only target the assets of the entity.
Establish an asset protection trust
Trusts are asset protection solutions that have been used for years. They protect your wealth from being taken from you in the event of a lawsuit. Since you don’t own the assets but merely control them through the trust, you cannot lose them.
It’s important to choose the right trusts and strategies that are suited for your specific needs and situation and to this end, you can ask assistance from a reliable business accountant, such as those of Chan & Naylor.
Asset Protection involves implementing strategies to separate your personal assets from your business risks. Asset protection is an essential part of any business structure to be considered by professional advisors and clients alike.
It is extremely surprising that many company directors or business owners continue to personally hold family assets in their own name, exposing their personal portfolio to the business risk they encounter in their capacity as a company director or a business owner.
No doubt you are well aware of the risks faced by business owners and other stakeholders in conducting business in this current economic climate.
We are continually hearing suppliers are tightening their cash control in particular areas of the economy and clients are slower and unable to complete their contracts when expected.
- Banks reassessing their lending criteria;
- Tightening credit levels;
- A more rigorous and active tax office in respect of audits and collection processes; and
- A decline in the general trading conditions for some sections of the economy.
In addition, there is now greater risk associated with being a company director.
Administrators/liquidators of companies can make directors personally liable for the actions of their company and the Australian Tax Offices (‘ATO’) can pursue directors by using their additional powers under s.588FGA of Corporations Act 2001 even where a Directors Penalty Notice is a full defence. Under s 588FGA of Corporations Act 2001, if a liquidator of a company recovers an unfair preference from the ATO, the ATO has the right to pursue the company directors for the amount which the ATO is liable to repay to the liquidator. Combined with recent changes to the Directors Penalty Regime, company director’s potential person liability has significantly expanded.
It has never been as important to assess your current asset protection strategies. Have you separated your personal assets from your business risks?
The best time to implement or update your strategy is when your company or business is in sound shape. Attempting to implement asset protections strategies once your business is in financial difficulty will leave you susceptible to bankruptcy law and possible civil sanctions.