Asset protection consists of strategies utilised to guard the wealth of individuals and businesses. Asset protection helps in protecting assets in a legal manner and without engaging in illegal practices such as fraudulent transfers, tax evasion or voidable preferences. In order to be effective and legal, asset protection strategies must be implemented before a claim or demand is made against a person.
Asset protection is most important in the context of protecting your assets from claims made by creditors. Frequently the most valuable asset of a person is their home and any investment properties they may own. Unlike cash and publicly traded shares which are highly liquid, property is less liquid and it takes time to sell. There are also sale and purchase costs and taxes associated with buying or selling of a property which makes this asset class less readily and quickly saleable.
Home ownership in Australia is widespread and many individuals often own their principal place of residence in their own name. Owning a property in your own personal name exposes that property if someone sues you, and the property is accordingly at risk of being seized and sold if a creditor obtains court judgment against you.
Individuals who are most at risk are business owners and professionals. Business owners (particularly business owners in the building and construction industry) frequently trade as sole traders in their own individual name. If they get sued by a customer for defective works, and the customer is successful in their claim, any property the business owner holds in their own name is exposed and may potentially be seized by the creditor for payment of their debt, interest and legal costs.
There are a significant number of potentially effective asset protection strategies that can be implemented to protect and quarantine assets from being seized by frivolous creditors. Some strategies involve tax planning and structuring and utilisation of trust structures, and in such cases you would need to obtain tax accounting and financial planning advice from a reputable accounting and financial planning firm (https://www.highview.com.au/).
When it comes to the main residence owned by professional services providers and other business owners, a potentially effective strategy is to have the business owner’s spouse own the property from the inception of purchase and to pay all mortgage repayments and outgoings relating to the property.
Another effective strategy with residential properties or commercial/industrial properties is to have such properties owned by a non-trading entity, such as a property holding company and property holding family trust.
It is beyond the scope of this commentary to discuss effective asset protection strategies in detail because such strategies will often vary from individual to individual and need to be adapted and changed to suit each relevant circumstance.
Our team at Parkston Lawyers can assist you with implementing effective and legal asset protection strategies to safeguard your assets from creditors’ claims.
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