What do we mean by assets? The obvious, property, cars, shares, money in the bank and the not so obvious, trademarks, patents, a business that you have built up, or rights you have acquired such as licences and distribution rights.
What’s the risk of being the owner of the asset?
You can lose it- to creditors, to ex-spouses, because of personal issues like gambling, addition to drugs, or it can be stolen. If it is an intangible it can be stolen in effect by someone simply usurping your rights.
Strategies to minimise risk and enhance asset protection:
- PPS registration
- ensuring title is in the right hands
- giving assets away
- making loans so that you can demand the asset or the money back, or
- utilising trusts to hold assets instead of you.
The PPS register is for registering interests over non-property assets (set up by the Personal Property Securities act of 2009), and those security rights can be over things like motor cars, industrial equipment, security offered for loans and so on. Registering an interest over an asset on the Personal Properties Securities Register, will in effect give you the benefit of a security interest (like a charge or mortgage interest) over those assets.
Don’t forget to check that the title to the asset is in the best hands and correctly shown. Sometimes parties assume that an asset is theirs, only to discover that it has been put in the name of a spouse, or a company or a trustee of a trust.
Giving assets away can be a useful strategy and is quite often utilised for parent to child arrangements by the empty nesters. There is risk – once you complete the gift and that may be, for example, in the case of property, providing the title deeds and signing the transfer so that the title definitely transfers to the recipient, then that asset will no longer be yours and it will be at the risk of the recipient. Additionally, when parties are close to retirement, making gifts can affect their pension entitlements, so there may need to be an effective strategy ahead of time if this is seen as a worthwhile strategy at all.
Rather than giving, particularly to children, a better strategy may be to make a loan. A loan which is properly drafted and preferably for which security is given allows the lender to retain control, but of course, the benefit passes to the recipient. Parent to child, it can be an effective way of contributing to the purchase of your child’s home, or upgrading their life style, but the risk of the value of that loan walking out the door should that marriage fail, or should that child be sued by a creditor can be controlled by the ability to demand repayment at certain trigger points.
Probably the most favoured strategy for asset protection is to hold assets in a discretionary trust. A trust structure is where one party, the trustee, holds assets as the legal owner for the benefit of others, the beneficiaries. Because the trustee is the legal owner of the assets, the beneficiaries merely have a right to be considered for distributions by the trustee, and in a well drafted trust deed, there will be numerous potential beneficiaries, so that there is not just one potential beneficiary in the firing line. Because any particular beneficiary doesn’t have a right to claim ownership of any part of the trust assets, they do not own the trust fund and the trust fund is not at risk by any claims on the beneficiaries themselves.
Unfortunately, family law and laws regarding bankruptcy have now got in the way of this once favoured strategy, and in certain circumstances, assets in a trust may be open to attack. However, if you do it right from the beginning and throughout the life of the trust, then it can be a very effective asset protection arrangement.
Trusts in a personal capacity
Given the increasing use of wills with testamentary trusts the variety and variability of the terms and their application is immense.
In some cases the terms of the trust are drafted broadly, to the maximum flexibility available at law to the trustees. In other instances the terms of the trust are limited, often at the request of the will maker.
They may have a particular concern at the time of making their will for example that the trust only benefit blood descendants, purposely cutting out spouses and in-laws.
A Testamentary trust has tax benefits such as the ability to make distributions to a wide range of beneficiaries determined by the trustee, allowing for tax efficient distributions and concessional tax treatment for minor beneficiaries. In addition, capital gains tax benefits as gains can be streamed to a particular beneficiary.
Other benefits include:
- Increased protection in family law disputes depending on the circumstances and limiting the potential risks of bankruptcy
- Asset protection from creditors because the assets are held by the trustee for the beneficiaries of the trust not directly by the beneficiaries
- Protection for beneficiaries by providing a structure to assist vulnerable beneficiaries who cannot manage their own affairs or who can be easily exploited
- A will maker may wish to provide for a problem beneficiary and wish to preserve the capital of their inheritance for his children and they may provide the problem beneficiary with a life interest in part or all of the income earned from the capital and restrict any capital payments to the beneficiary.
- The level of assets passing to the trust must be sufficient to justify compliance costs of maintaining the trust, including ongoing annual accounting fees together with other professional and compliance fees
- Onerous documentation required – trustee decisions and distributions of trust assets should be properly documented, which requires formality and often the assistance of accountants and lawyers to prepare the documents
- Depending on the terms of the trust, a main residence held by the trust may result in a loss of CGT and land tax exemptions
Shareholder or unitholder agreements are extremely important, and well drafted agreements to regulate not only the governance of your business throughout the business life, but how you achieve value from your share of that business, or acquire other shares of the business to enhance your own shares value will be determined by that deed. Buy/sell agreements utilising insurance can be very useful to ensure that the asset becomes part of your estate, or at least the value of it does. And of course, you do want to minimise the risk of your business by a co-owners departure and need very effective restraints to stop them acting in a way which will cause detriment to the value of your assets – the business.
Too often agreements regarding distribution or franchise rights are poorly drafted, particularly when the distribution rights are coming from overseas. Get those distribution agreements reviewed and if you have the bargaining power, try for effective protections against the supplier allowing parallel or grey imports, perhaps insisting that they take action to stop such imports, and other steps to ensure that there will not be too much loss of market share to others, which is beyond your control. Effective drafting and advice on the arrangements can help you plan to minimise loss of value.