Asset protection is a philosophy and way of life
Asset protection is a lifetime pursuit. Asset protection is an ongoing journey. If you are truly ready to start the journey your life changes. Everything you do is tested against the best practice of asset protection.
Work through this webpage. You or your spouse, perhaps both, will cry. To get you in the correct mental state to begin reading these materials go to your bathroom. Go alone. Lock the door so you won’t be disturbed. Look in the mirror and ask where your spouse and children will sleep tonight if you go bankrupt.
I hope these free resources start your life long journey of protecting what you own: your money and family.
Asset protection keeps assets out of harm’s way
Someone sues you. But they only get your assets. You have nothing. You are a ‘person of straw’. They cannot get the assets held in your safe harbours:
- ‘spouse of substance’ your non-working spouse (do not worry, if your spouse leaves you the family court just directs some of the assets back to you)
- ‘clean skin family trust‘ – only holds safe assets such as shares (does not hold risky assets like real estate. And does not hold very high risk assets like businesses)
- Self-Managed Superannuation Fund
Business owners risk bankruptcy and insolvency every day
Business owners – whether small or large – and professionals face constant exposure to lawsuits and insolvency. Professional Indemnity insurance companies often wiggle out of not paying. You bet the house on a successful outcome with every client who comes in the door.
Are small businesses less risky?
“My small business does not make much money. Therefore, it has less risk”. This is false. The amount of profit (or loss for that matter) is not related to the level of risk. A small business leads to the loss of your home and other assets – just as fast as a big profitable business.
Renting out real estate is a risky business
Like professionals with insurance, anyone who owns rental or commercial property is also a target for a lawsuit. As a “deep pocket” defendant, a property owner is a virtual magnet for frivolous claims.
Sound legal foundation:
Asset protection does not involve hiding or concealing assets. It is not about defrauding creditors. A properly constructed asset protection plan achieves your objectives while fully and truthfully disclosing all of your financial circumstances.
Discourage a potential lawsuit before it begins. Before suing, the plaintiff’s lawyer checks that the defendant has assets to pay if they win. The plaintiff’s lawyer performs a financial investigation of the target defendant’s assets. They seek to locate any real estate, bank accounts or other valuable property. If the defendant has substantial, reachable assets the lawsuit proceeds. If the investigation reveals that your assets are not in a seizable form, only the most self-destructive plaintiff incurs the expense of proceeding with the case.
Seek control – not ownership:
Asset protection allows you to maintain control and enjoyment over the property – without the need for ‘ownership’.
Asset Protection for Wills and Estate Planning
Your Will should contain:
- Bankruptcy Trust – if children, grandchildren ever go bankrupt
- Divorce Protection Trust – preserve the capital from children divorcing)
- 3-Generation Testamentary Trusts – each child and then your grandchildren have their own trusts. This reduces death duties such as Income Tax, Capital Gains Tax and Stamp Duty
- Superannuation Testamentary Trust – stops the 32% tax payable on when your super goes to adult children
- Special Disability Trusts – are put into every one of our 3-Generation Testamentary Trust Wills
Protect Family Assets: Above all else, the asset protection plan accomplishes its primary purpose of sagely insulating and preserving family assets from attack.
Asset Protection – strategies
1. Limit Liability in your Structure
The best time to consider Asset Protection is at a business start-up. The type of entity, where it is formed and how it is financed impacts on the security of your personal and business assets. Minimising income, CGT and death taxes are also forms of asset protection (here it is the government, not some creditor, who goes after your wealth). A common Australian business structure is:
A single person or couple:
* build a company (to run the business through, not preferred)
* build a Family Trust where the company is the trustee of the Family Trust
Two or more families, e.g. brother and sister, or two unrelated persons
* build a Family Trust for each Unit Holder. The Units are held in each Family Trust
2. Having all your assets in one trust – ‘one bad apple’
One asset in a Family Trust that goes bad contaminates all the other assets in that Trust. There are two types of assets. “Unsafe” assets like business operations. And there are ‘safe” assets like shares and real estate. Don’t mix unsafe business assets with shares and property. Build two Family Trusts. One is for unsafe business assets. The other is for safe assets.
3. Add firewalls & levels of protection
If your entity lacks assets to pay debt, the creditor often seeks to access the director’s or trustee’s personal assets. Companies no longer provide much ‘limited liability’ – and none against the ATO. Many old company Constitutions force you to have two directors. You can convert to a Single Director Company. Then one of your directors resigns. For a trust, replace the human trustee with a company – this provides another firewall.
4. Business Succession Planning
One key person gets sick and dies. Their whole business may fall apart. Business Succession Planning is all about the remaining partners getting the sick or dead partner out of the business with a fist full of dollars for the grieving spouse.
5. Bankruptcy Safe havens –
‘man of straw and woman of substance’
The 3 safe havens are: ‘non-business spouse’, Superannuation and a clean skin Family Trust (the Family Trust only has safe assets in it)
The ‘man of straw’ and ‘women of substance’ is a powerful strategy. One spouse takes all the risk: directorships, trusteeships and runs the business or provides the professional services (like an engineer or doctor). The non-working spouse holds all the assets: home, bank accounts, shares and property. If they ever separate all the assets are divided up by the Family Court.
Superannuation as a safe house – escapes bankruptcy
Assets in a superannuation fund are expressly excluded from the definition of divisible property in section 116(2) of the Bankruptcy Act 1966. This means that individuals exposed to creditor risk usually have their superannuation account balances or entitlements protected in bankruptcy.
While a dependant of a deceased fund member would usually retain protection of assets from creditors if the assets were paid via the deceased fund member’s LPR into a testamentary trust, such creditor protection is only possible with a Bankruptcy Trust in a Will. If instead death benefits can be paid as a death benefits income stream, creditor asset protection is maintained.
Where business premises are held in an SMSF, in addition to any taxation and other estate planning advantages that might be achieved, the principals of the business are able to separate the business premises from the risk of running a business.
Any guarantees, indemnities and security that directors and shareholders might provide in respect of the business do not extend to the business premises because of the premises being held in the SMSF.
6. Bankruptcy Trusts and Divorce Protection Trusts in your Will
Bankruptcy Trusts and Divorce Protection Trusts in your Will protects your children and grandchildren from attack. See here: https://www.legalconsolidated.com.au/divorce-protection-trust-in-your-will/
Start building a 3-Generation Testamentary Trust read the hints and watch the training videos. As you go on this journey you will gain a lot of information and educate yourself.
7. Leasing out a property and setting up a ‘bed and breakfast’
You own a property. You decide to lease it out via a website. For example, Air B&B. Or you decide to set up a ‘Bed & Breakfast’. There is risk in running a ‘business’ – any business. Renting out a property short term is a ‘business’. It carries risk. You take out all the ‘landlord’ insurance that you can get. But there is still risk. The property, and in fact all your assets, are at risk if something happens and you are sued. To mitigate or reduce that risk you can put in an ‘interposed entity’. Instead of you, the owner of the property, a company as trustee of a family trust rents out the property. This is how to set up that structure.
Can I move the premises into a Family Trust? There is about 4.5% stamp duty and Capital Gains Tax when you transfer property. So it is generally not worthwhile to do this. Also, if you transfer your family home into a trust – such as a Family Trust – then you lose your CGT tax-free status on the family home. Instead, it is better to just have the Family Trust run the ‘business’ and let the Family Trust rent out the property.
If the family trust does not ‘own’ the real estate then where is the business? The Family Trust owns a right to rent out a property. The owner of the property (you) enters into a long term lease from you to the family trust. The family trust then goes out and markets the property to rent. The ‘asset’ of the family trust is the right to rent out a property.
Can I put shares and other ‘safe’ assets in my ‘trading’ Family Trust? That is naughty and wrong. Remember Michael Jackson’s song: One bad apple spoils the whole darn bunch. Do not mix ‘risky assets’ (such as a business) with safe assets (such as shares). Instead, build a family trust for the ‘risky’ business assets. And build a separate family trust (‘clean skin trust’) for the safe assets. Remember, as well as a ‘clean skin trust’ you may have other ‘safe havens’. These include your ‘non-working non-risk spouse’ and superannuation.
8. I am a professional with my own Professional Indemnity insurance
Do not rely on insurance to save you. Insurance companies do go insolvent. For example, HIH Insurance was Australia’s second-largest insurance company. It went bankrupt. It is the largest corporate collapse in Australia’s history. Big insurance companies can and do fail.
Insurance companies may not want to pay out because that lowers their profits. You may act outside the scope of your profession. Therefore, your PI insurance cannot cover you. E.g. lawyer gives financial planning advice. E.g. engineer gives interior design advice. E.g. GP gives medical specialist advice. E.g. Dentist gives medical doctor advice.
Instead, it is better to have 1. good business systems 2. good business structure 3. no assets in your name. Depending on the State, some professions such as doctor, auditor and lawyer cannot share profit or operate through a family trust or a unit trust. They should 1. consider setting up a service trust agreement; and 2. not have any assets in your own name.
9. Personal Guarantees
Banks and trade creditors love to lock in as many people as possible to secure the debt. You, your spouse, your mum and dad, your children are all useful cannon fodder to a lender. Often you spend years setting up your asset protection only to find the ‘safe house’ spouse signs an ‘innocent’ looking piece of paper called a ‘personal guarantee’. At times this may be fine. For example, if your spouse is buying a house then it may be fine to guarantee the mortgage. But fight back.
We had one situation where (by mistake) mum and dad were both directors of a company. The bank demanded both sign personal guarantees for the companies’ new overdraft. We got involved and Mum refused to sign. Instead, they amended the company constitution to allow a one director company. Dad then applied as a single director to the same person at the same bank. The wife was no longer required to sign a guarantee. The company got the overdraft.
Think twice before allowing the ‘safe house’ spouse to sign guarantees.
10. Does transferring assets to a ‘safe house’ work?
Sackville J in Prentice v Cummins (2002) 124 FCR 67 states:
“I am prepared to assume for the purposes of this case, without deciding, that if all that is known is that a professional person:
- transfers the bulk of his or her assets to a family member for no consideration;
- has no creditors at the time of the transfer (or retains assets sufficient to meet all liabilities known at that time);
is not engaged and does not propose to engage in any hazardous financial ventures; and
- intends to protect the transferred assets from any action brought by a client who might in the future sue for professional negligence (there being no such suit in the offing at the time of the transfer),
then s121(1) of the Bankruptcy Act does not render the transfer void against the person’s trustee in bankruptcy.“
Wallace Case – bad bankruptcy law
However, the Federal Court decision of Turner (As Trustee of Bankrupt Estate of Wallace) v Wallace  FCCA 963 suggests that transferring an asset to a spouse may not work.
Facts of Wallace Case insolvency case
Mr Wallace is an accountant. He goes into a family business of motor vehicle retailing. He transfers his interest in his family home to his wife. This is when he became director and took on a number of personal liabilities. These included responsibility for a financing arrangement with St George Bank.
Ten years later the business failed. The trustee in bankruptcy tried to claw back his interest in the family home.
The decision of Wallace Case – section 121 Bankruptcy Act 1966
The Court held that the transfer of Mr Wallace’s interest in his home to his wife was void. This is under section 121 Bankruptcy Act 1966 (Cth).
Bankruptcy laws provide that if people seek to transfer assets to avoid an actual or impending liability, then the transfer is voidable.
The Court stated:
- “Although I have found that the agreement upon which the wife’s defence rests is not made out, this does not, of course, mean of itself alone that the transfer to her of the husband’s interest makes the transfer void pursuant to s 121 of the Bankruptcy Act 1966 (“the Act”). The husband, after all, has denied that the transfer of the property was in any way designed to defeat creditors. He says he had no idea at the time that he would have any such creditors…
- …Furthermore, although the wife denied it, I think the husband and the wife must have discussed this. It was a major alienation of property. It altered the legal ownership of it. There is, in my mind, no doubt that a couple happily married (and the wife was an intelligent woman and a business woman herself) would have failed to discuss the matter of so much moment. The underlying detail of the potential risks in Ripponlea Motors may well not have been fully disclosed to the wife but I have no doubt that it is more probable than otherwise that the intention and effect of the transfer was…
- …Likewise, on the evidence I have no doubt that the husband’s main purpose in making the transfer was to prevent the transferred property from becoming divisible among his creditors should there ultimately be any. I make this finding in essence for two interrelated reasons. First of all because I do not accept and indeed entirely reject the explanation that the wife and the husband have proffered. I do not accept that there was any representation or agreement as they have alleged.
- Second, that explanation being rejected, no other explanation makes any real sense. It seems clear to me beyond doubt that in transferring the property to his wife the husband was protecting it against creditors even though he may or may not have had any active appreciation that there would be some. He was on any view very heavily personally committed to the business by the time the transfer took place.”
Consider section 121(4). It would have had to have been satisfied, requiring that “it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent.”
But section 121(4) requires the transfer and the insolvency to be close together. Sadly, the Court in the Wallace Case instead took a narrow interpretation of the law.
The Court’s reasoning was based on a ‘hazardous financial venture’ test. It argues that ‘motor vehicle retailing’ is a hazardous financial venture. This justified it accepting a 10-year gap. This is between the transfer of the interest in the home and his ultimate bankruptcy.
The Court stated that given Mr Wallace was embarking on a motor vehicle retailing business. Ant that this was a hazardous industry. Therefore, it is expected that sometime in the future, failure may happen. Therefore, the transfer of the home at the beginning is to defeat future creditors.
Remarkable this is even if those creditors were not known at the time. But section 121(4) requires that “it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent.“
But wasn’t Mr Wallace a bit naughty?
But with respect all businesses are hazardous. The case is bad law in our view. But I can see the Court’s problem. Mr Wallace was a bit naughty:
- Mr Wallace is already committed to business debts at the time of the transfer
- Mr Wallace is exposed to potential personal liabilities before the transfer
- The guarantee to St George was signed close to the time of the transfer
- Sure the liabilities did not arise for another 10 years but there was a connection between the transfer and the his personal liabilities
- Mr Wallace continued to represent to his creditors (including St George), that he held an interest in the family home. (Have a look at what he said when he applied for debt.)
So, okay, maybe I am a bit harsh to suggest that the Wallace case is bad law. Instead, I believe the case will be limited to the facts. Since we will never have identical facts, it is likely the Wallace case will never be reliad on by any other court.
Conclusion: We still state that you should transfer early and often to your safe harbours.
Family law – can your lover, mistress and spouse take your money?
How long have you been with your spouse or de facto partner? Once you have been together for 8 – 10 years you tend to lose half your assets to that person. And you tend to get half of their assets. This is if you break up. We believe that Binding Financial Agreements no longer work. But you make up your own mind.
The Courts now appear to allow bigamy in Australia. If you have a spouse and a lover then you get hit twice in the family court. See here.
(While a Divorce Protection Trust in your parent’s Wills stops your spouse taking your parent’s money when you die, your wealth is at risk.)
My advice? Marry wisely. Don’t waste money on a mistress. If you want to waste money build a swimming pool or buy a boat.
Does a sole trader count as owning a small business?
Irrespective of the structure (Family Trust, Company, Unit Trust or Partnership) you are running a business if you are providing a product or service to the public. Otherwise, you are an employee. A sole proprietor or not.
I don’t earn much and the chances of being sued is low
Risk is risk. If you are running a business there is risk. Risk is not related to how much money you are making from your business. But you have to weigh up the cost of operating out of business structures like trusts. These factors suggest you need a company as trustee of a family trust:
- risk of being sued (don’t kid yourself, every business suffers this risk)
- assets in my own name
- a lot of children over 18 or other family members to distribute income to (point 3 is more about reducing tax, rather than asset protection)
In contrast, if you have little risk of being sued and, in any event, you have no assets in your name – then the value of a business structure is less.
Does Joint tenancy override the trustee in bankruptcy?
Any advantage of having an asset owned as joint tenants? Rather than tenants in common? Does it prevent a trustee in bankruptcy getting access to the asset?
Each joint tenant effectively owns an interest in the entire property. Does it make it very difficult for a trustee in bankruptcy to seize the property?
That is not correct. Under the Bankruptcy Act at bankruptcy, the joint tenancy is effectively severed. The trustee in bankruptcy unilaterally secures their ownership of their percentage of the property. (E.g. a half, one third, on quarter, or whatever the case.)
Sure the remaining owner(s) talk with the trustee in bankruptcy about whether to sell etc… Or the remaining owner can seek to buy out the trustee in bankruptcy’s interest in the property for market value.
The trustee in bankruptcy may not accept the offer from the co-owner. He can seek to sell the property on the open market.
Even if the co-owner wanted to oppose such a sale, the trustee in bankruptcy can obtain court permission for a statutory sale.
Following the statutory sale, the co-owner and trustee in bankruptcy share the proceeds. This is according to your proportionate ownership interests.
The lesson? The person of straw should own no assets. The joint tenancy asset should have been transferred into a safe harbour years ago. Where it is a family home you are living in then your ‘person of substance’ spouse is the best person to own the home. This is so your spouse can get the tax CGT status of a family home.
If the asset is not a family home then there are other ‘safe harbours’. Such as a ‘cleanskin’ family trust.
If your spouse leaves you then the Family Court divides us the assets. The Family Court looks through Family Trusts and looks through who is the current owner of the assets.
Joint tenancy is also bad for Capital Gains Tax.
Questions asked for asset protection
Transfer my assets into a ‘safe harbour’: such as a ‘cleanskin’ Family Trust or spouse?
It is a good idea to transfer assets out of your high-risk name or business into a safe harbour. I love it. However, when you transfer an asset there may be transfer duty (stamp duty) or Capital Gains Tax. For example, on real estate, you pay about 4.5% transfer duty. This is on the market or sale price: whichever is the higher. You also pay Capital Gains Tax. With shares, you pay CGT, if they have gone up in value.
In contrast to land and share, you can usually move cash from an unsafe spouse to a family trust or the ‘spouse of substance’ for no transfer duty or CGT.
Can I move business assets out of my name?
It is also a good idea to get risky assets, like a business out of your name and into another entity, such as:
- a company as trustee of a family trust – but only if it is just you and your spouse
- a company as trustee of a unit trust – good if you are co-owners of the business with someone other than your spouse – such as your children or friend
- partnership of family trusts – similar outcome to owning the business through a Unit Trust
You can move a business name for no stamp duty or CGT if the business name has no value. Get a note from your accountant to say that the business name has no value. Or you can register a new business name in the family trust: and start a new business from scatch.
Can I negatively gear in a family trust, unit trust or company?
Negative gearing is where you make an ‘income loss’ which is tax-deductible. This is with the hope that the asset goes up in capital value. In Australia, you generally only pay tax on this ‘capital gain’ when you sell or dispose of the asset. If you own the asset in your own name or in a partnership you claim this ‘income loss’ straight into your income tax return. But they are not good for asset protection. They are not good for income splitting.
You are better to have a family trust, unit trust or a company structure. But, those structures trap the ‘income loss’. You cannot those losses out to the beneficiary or shareholder. The only way to ‘use up’ the ‘income loss’ is to have some ‘positively geared’ or other income in the same trust or company.
Am I an employee or a contractor?
As a mere employee, you are usually low risk. It is generally your employer that gets sued. You operate a brick contracting business. All businesses are high risk. You are therefore the person straw. You and your business structure (perhaps a company as trustee of a family trust) have none or few assets. Your spouse operates a hairdressing saloon. But your spouse is smart, your spouse is just a mere employee. You (the person of straw) are the sole director of the company that operates the hairdressing saloon.
Even when employees are on a “frolic of their own” the boss is still liable. The opposite is true for ‘independent contractors’. This is the difference between an employee and a contractor. There is also ‘in-betweens’. For example, a person on 100% commission is generally still an employee. But you need to look at the contract between the parties. What if your employer makes you get an ABN? If you have an “ABN” (Australian Business Number) then you ‘own’ a business – with all the risk of running a business. If you have an ABN you are likely to be a contractor – not an employee.
Use my company as a trustee of many trusts?
A company is an expensive mouth to feed so you want to get your money’s worth. A company can wear many hats. It can trade in its own name and it can be a trustee of 100s of family trusts. But should you? Let’s say you have two family trusts: one runs the business (high risk) and the other owns shares (low risk). You could have the same trustee for both of those family trusts. I don’t mind. That is fine. But be aware of two problems:
- mixing assets – often you make a mistake and use the company for the wrong purpose. E.g. you purchased shares for the safe family trust using money from the business family trust. Things get complex.
- telling the story to the liquidator – if the business family trust fails you have to carefully explain to the time-poor liquidator that the company as trustee for the business is not related to the trustee company of the (safe) family trust (that just owns passive shares). Make sure your records are perfect.
Does a trustee always get an indemnity out of trust assets?
If a trustee gets sued over the trust or the trust assets then the trustee can use trust assets to defend himself. This is called an ‘indemnity’. The trustee can indemnify himself out of the trust assets. But there are limits on the trustee’s right of indemnity from the trust fund.
Was the trustee discharging his proper duties? If so then he is entitled to an indemnity for all liabilities incurred out of trust assets. The indemnity is enforceable under a charge or right of lien over trust assets. This means the trustee can physically take the assets and dispose of them to recoup the losses he, as the trustee, suffered. See Commissioner of Taxation v Bruton Holdings Pty Ltd (in liq)  FCA 978.
But the trustees first shows that the expenses and liabilities were properly incurred in the business of the trust. Such activities include preserving and selling trust assets. But not always, consider Bare Trusts.
Most trusts are Family Trusts and Unit Trusts. But there are also four common ‘Bare’ Trusts:
- Declaration of Trust BEFORE you buy – ‘secretly buy’
- Acknowledgement of Trust Deed – ‘AFTER the Trustee buys’
- Bare Trust – ‘hide assets you own’
- Gifting Trust – ‘deathbed declaration’
Where the trustee is acting as a bare trustee, his duties, powers and rights are limited solely to:
- protecting trust assets; and
- then conveying them on demand to the beneficiary.
Bruton Holdings Pty Ltd was running a court case. But the court case was not related to the trust. Therefore, Bruton was not able to use trust assets to fund its non-related court case. The running of the court case is unrelated to merely protecting trust property. This was perhaps a little unfair. Consider the time the liabilities are incurred. The court proceedings took place only when Bruton was acting as a bare trustee.
Bruton, the corporate trustee, was only holding the trust property without any actual interest in it. The newly appointed trustee was about to take over over management of the trust. Thus the costs went beyond what the trustee was authorised to incur. Therefore, Bruton Holdings Pty Ltd was not reimbursed out of trust property.
In summary, it is dangerous to be a trustee. Put someone in as trustee that you are prepared to lose. Expendable persons include a corporate trustee or your ‘husband of straw’!
Adj Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
39 Stirling Highway, Nedlands, WA (Post Office Box 5169, Dalkeith, WA 6009)
After hours: 0477 796 959
National: 1800 141 612
Email: [email protected]