Legal Tip 16: Asset Protection: General Issues

Asset Protection: General Issues


The idea of asset protection is to put family assets out of the reach of creditors if one or more family members were to end up bankrupt. But asset protection on death should also be considered as you want to make sure ‘your’ assets don’t end up in the wrong hands. Family Law is another area to consider as assets can be lost in family law type disputes.


Just considering bankruptcy for the moment, there are 2 broad aspects to consider

1. Protection for existing assets and
   
   
2. Protection for future assets
   

Future assets can be easily protected by setting up ownership structures which can be planned from the beginning.


Existing assets are more difficult as any transfer will result in

1. possible transfer duties such as stamp duty
   
   
2. possible capital gains tax
   
   
3. potential clawback provisions relating to the transfer
   

Changing ownership may not save the asset as there are clawback provisions to consider under several areas of law

1. Bankruptcy Act
   
   
2. Conveyancing Act
   
   
3. Corporations Act
   
   
4. Family Law Act
   
   
5. Succession Act
   

Transferring ownership must generally be done at market value, otherwise the transaction would be more easily attacked. That will mean the transferor (the person transferring) will receive a large sum of cash. This cash is then property that is at risk under the bankruptcy and other acts mentioned above. Therefore the cash must be spent, or gifted. If it is gifted then it is an ‘under market value transaction’ and this will be subject to clawback provisions.


Therefore it is important to consider asset protection before purchasing any asset of value. ‘Fixing’ things later can be expensive and the asset protection can never be as good as if it was set up from the beginning.

 

My son has a partner recognised as 'Defacto' on her visa. She does not have PR.
She feels any house bought by him currently would be joint property.
But she is not a stable person. Also, strong ties to her home country, Spain, which is 'home'.

I want to help him buy a house in this favourable climate, which is his heartfelt wish.

What kind of lawyer is it that can assist with setting up a structure that would protect the asset from claims by this partner should she quit the relationship and seek a settlement of his assets?

I'm thinking of me buying the asset to be held by a bare trust, with him as the beneficial owner. They would both pay me rent to offset the loan interest.

 

Why not a discretionary trust?

 

If he is the beneficial owner it is his property for family law and bankruptcy purposes. It would also not be possible to rent it to him. You would not be able to claim the interest either as he would be considered the owner for tax reasons.

see also
Legal Tip 185: Transactions to Defeat Family Law Claims Legal Tip 185: Transactions to Defeat Family Law Claims

Legal Tip 323: The Need to Disclose Trusts in Family Law Property Settlements Legal Tip 323: The Need to Disclose Trusts in Family Law Property Settlements


You should see a family lawyer that knows trusts or a trust lawyer that knows family law. You might be better off just owning the property legally and beneficially yourself and renting it to the at market rent or under market rent depending on the circumstances.

 

Would it be able to rent it to him? Is there a NAL preclusion?

 

Thanks for the guidance, Terry. What is your field of Law, good sir?

 

I concentrate in the areas that I write my legal and tax tips on. Estate planning, asset protection, structuring, trusts etc.

 

Hi Terry,

Hubby and I are buying our PPOR in QLD, which we will live in for the foreseeable future, e.g 10 years or more. We don't have any Investment Properties and don't plan to buy any in the near future.

He is a sole trader business owner, breadwinner and risk taker. I am a stay at home mom with no income and no involvement/interest in his business either.

We are trying to plan ahead and put our future family home out of the reach of creditors. Which of the following scenarios you reckon would be our best bet:

1- Both of us on the loan. Ownership as Joint Tenants.
2- Both of us on the loan. Ownership as Tenants in Common (%50 %50; %90 me %10 him; or?)
3- Perhaps our best bet is for him to be the only name on the loan and the title? Maybe we could utilise other methods you mentioned in your previews legal tips like Spousal loans?
4- any other methods?

I hope it goes without saying how helpful your posts are.
Thank you.

 

My first through is why is he still operating as a sole trader ? Thats your issue not so much the property. Downsides:
1. No workers comp protection from a workplace accident or injury
2. Personal liability for creditors or damages
3. I will guess no super (far too common with sole traders but less common with those who run a company)
4. Probably has already given guarantees personally to suppliers on accounts etc
5. Sole traders are subject to full tax on profits and cant defer or avoid that. A company may offer tax deferral savings and benefits and also a 25% future tax rate (2021-22)

A lender will expect him to be a borrower, and on title so property ownership is likely to not be a issue to fix. Lenders these days dont accept the old 1% / 99% etc and even if they did a solicitor may seek to attack your 99% interest based on the fact he has been the breadwinner and its a scheme to defeat creditors. So largely futile. That said a mortgage does assist to give some asset protection since Westpac will stand secured before any creditor.

I would be getting structure advice and credit advice concerning the imapct any changes could have on ability to borrow. Lenders are usually pretty fine with a shift from sole trader to company esp if the sole trader activity is evident for many years.

 

Tenants in common is generally safer than joint tenants. Sole name (yours) generally safer, upon bankruptcy, than his.
But it is also who pays the loan that counts.
A property in the name of B but B not working and no income with A paying the loan of B would be at risk if A went bankrupt. It may not be protected at all or only partially protected from creditors.

But lots of other asset protection issues to consider too so best to get some legal advice.