The 3 Best Strategies for Property Asset Protection
Creating an asset protection plan to minimise your risk is as important as building your asset portfolio in the first place.
Yet, many Australians remain unaware of the significance of utilising asset protection strategies to safeguard those assets.
Sure, insurance can protect you against some risk. But no insurance cover will shield you from all risk.
So, it’s worthwhile equipping yourself with the various asset protection strategies out there so that you can safeguard your personal assets.
Here’s what you need to know about the three best strategies for property asset protection.
But First, What Is Asset Protection and Why Is it Important?
Simply put, asset protection is a means of shielding your personal assets from being used to meet a creditor’s claim.
If you’ve created your wealth through an asset portfolio under your name, you’re especially vulnerable to losing your assets if you’re a business owner (and things don’t go as planned) or if you’re being sued.
Any business has risks, such as:
- Project going wrong
- Market changes dramatically e.g. covid or trade tensions stops/slows supply of building materials already committed to projects
- A customer going out of business and unable to pay your invoices
- You get injured and unable to work
- Government changes the rules e.g. zoning
Asset protection helps business owners separate the business risk from their wealth and protect their family and their home.
To reduce that vulnerability, it’s vital that you implement strategies to protect your property and personal wealth from potential loss of control.
There will always be limits to your insurance coverage because it can’t protect you against every possible scenario. So, while it’s essential to have insurance in place, it’s important to implement additional strategies to protect your assets.
The 3 Best Asset Protection Strategies
Asset protection is not just for the wealthy. Protecting your assets in any circumstance is in your best interest.
Here are some of the best asset protection strategies that you should consider implementing.
1. Discretionary Trusts
A trust is a legally recognised relationship that exists between the trustee and the trust beneficiaries. So, a trustee holds assets in a trust for the benefit of the trust’s beneficiaries.
Having property in a trust is the most common form of asset protection because, unlike individuals and companies who can sue and get sued in law, a trust is not an entity in its own right.
Any assets held in the trust are held in the name of the trustee.
A discretionary trust is the most common type of trust in Australia because it offers the most flexibility in distributing trust income. The trustee is given complete discretion as to how the trust income is distributed to the beneficiaries.
A typical discretionary trust associated with asset protection is a family trust.
Individuals and property investors choose to use their family trust as an asset protection strategy because it creates a separation between the owner and those who will benefit. So, the beneficiaries have no right to any of the property within the trust.
Having no interest in the trust assets means that if any of the beneficiaries become liable to settle debt, a creditor won’t be able to obtain an order against the trust property.
To learn more about family trusts, make sure to check out our article where we weigh up the pros and cons of using discretionary trusts as a vehicle to purchase an investment property.
It’s worth noting, however, that a discretionary trust can be used to purchase interests in businesses, shares in companies and investment properties. So, the trust can have its own creditors, and those creditors have a right to property held in the trust.
Another consideration you should factor in before moving your personally held assets into a trust is:
- that the trust will become the new legal owner of those assets; and
- the transfer of the asset to the trust is likely to result in high stamp duty costs and capital gains tax issues.
2. Spousal Ownership
Suppose you have a spouse who isn’t involved in high-risk commercial or professional activities. For example, they don’t own and run a high-risk business.
If that is the case, and you’re the spouse who operates within a high-risk industry, then you may want to consider having the property under your spouse’s name.
Generally, if the low-risk spouse owns the property in the portfolio, it would be difficult for one of your creditors to gain control of that property.
So, another way you can protect your assets is to transfer any property held in your name to your spouse’s name.
Example
Laura and Justin own their family home in equal shares.
Laura works in a high-paying corporate position, and Justin recently entered into a partnership to start an electrical business.
After a few years, the electrical business begins to boom, and he can hire more staff and set up an office space.
While the business continues to grow, so do its liabilities. Along with the office space, Justin’s business has also financed a few new business assets.
As a partner to the partnership, Justin would be personally liable for the business’s financial debts, and the business’s creditors could have a claim against his family home that he shares with Laura.
Laura is in a stable employment position, so she would be considered a low-risk spouse. To minimise their risk, they decide to implement an asset protection strategy to transfer the family home into Laura’s name.
Now that she has 100% ownership of the home, if anything had to happen to Justin’s partnership, the business creditors can’t gain control of Laura’s property.
3. Business Restructuring
If you’re currently running your own business and own assets such as property in your personal name, you’ll want to avoid structuring your business as a partnership or sole trader.
Sole traders and partners to the partnership are personally liable for their business’s financial or tax debts.
So, a business creditor has the right to use your personal property assets to settle any debts owed by your business.
This is not an ideal situation when it comes to implementing asset protection strategies.
On the other hand, however, if you set your business up as a company structure, you would be establishing a separate legal entity. The company can be sued for outstanding debts, but your personal assets would be protected from the company’s creditor claims as long as you haven’t given personal guarantees.
There are various legal compliance requirements for setting up, registering and running a company, so you would need to make sure you consult with a professional who can advise you on how to proceed with business restructuring.
Key Takeaways
As an owner and investor, implementing property asset protection strategies should be high on your priority list.
Without an effective asset protection plan, you risk losing your assets to your creditors should an unexpected event occur.
While this blog intends to guide you on asset protection and asset protection strategies, there is no one-size-fits-all when it comes to protecting your assets.
Each person’s property portfolio is structured differently, and you would need to consult with an asset protection specialist to arrange a plan that will best protect your assets.
Another advantage of implementing an effective asset protection plan is that many strategies come with tax benefits.
At Property Tax Specialists, our primary focus is helping property investors maximise their opportunities and asset protection while legally minimising their tax liabilities.
To discuss any matter relating to structuring your rental investments, protecting your assets or arranging your affairs for minimum tax, get in touch today.
Disclaimer:
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.
