“It won’t happen to me”, “It is unlikely I will be sued,” and “I have insurance” are things we as Accountants hear our clients say all the time in our day-to-day activity. Occasionally these statements are tested when something unexpected happens in someone’s life or business, and sadly, for those without a good approach to risk management, the outcome can be devastating.
Rarely do many of us stop and take a good look at our lives, to recognise changes in our personal and business situation and to take time out of our busy schedules to focus on the protection of our hard earned wealth. Good risk takers find the time to work with a diligent adviser to oversee and ensure their wealth building plans are not easily undone.
An effective asset protection strategy is about reviewing and understanding the risks and adopting measures to protect family and business assets.
Many people think that lawsuits only apply to high risk occupations such as obstetricians, engineers and professional advisers. Sadly, this is just not the case. In fact litigation is becoming quite common and its prevalence continues to increase in Australia. Quite often, if not carefully examined, you may find your insurance policy does not actually cover what you expected.
Recently I was speaking to a family colleague, his wife was caught in a defamation claim, the home was in her name and unfortunately they did not have an asset protection strategy in place. While it was no fault of her own, they had to settle the claim. With careful planning and implementation of a well designed trust structure including an equity protection solution for their home, they would have had a much greater degree of protection from the legal claim. Not long after, I met with one of our new clients for a preliminary risk review.
Identifying the risks
Our client owns a successful engineering business. As part of our strategic review process we conduct a business and personal risk review which examines each of the items below:
An effective asset protection strategy is about reviewing and understanding the risks and adopting measures to protect family and business assets.
- We confirmed the engineering business was operating through a hybrid unit trust structure which had been set up years prior. The trust was the ideal structure to run and operate the business. All the business assets were owned by another asset protection trust and therefore adequately protected. The trust deed did however require an upgrade to ensure that it was covered for recent legislative changes.
- Recently an offer was made to two employees of the business to become equity owners. The problem with the unit holders agreement was the absence of a clear succession plan and in addition to this no funding mechanism to protect the business owners if one decided to sell, retire, was required to leave due to health reasons, disability or traumatic illness; or unexpected death.
- We confirmed that the key person, skill retention and emergency management plans and policies were in place.
- We found the family residence with no mortgage, was owned in the clients wife’s name, which provided a reasonable degree of asset protection.
- Upon inspection of the portfolio of investments (property/ shares/cash), we found all were protected appropriately by insurances and appropriate asset structures except for one property in the husband’s name. All other assets owned either in their family investment trust their superannuation fund.
- We looked over the couple’s personal insurance cover confirming that the family was adequately covered. We did however update some of their policies to take advantages of important new features and more favorable clauses offered by other insurance providers.
- We checked to see that general insurance, health cover, professional indemnity and business insurance was all in place and adequate, finding the only deficiency was that the professional indemnity had not been updated to cover a new area of service the business was operating in.
- We confirmed they had completed binding nominations for their superannuation and nominations for their insurance in accordance with their estate planning review. We had previously arranged for their wills to include discretionary testamentary trusts which are created upon death. The trusts are designed to protect personal assets for future generations (Children/ Grandchildren) from potential creditors, bankruptcy and/ or due to marriage/ de facto breakdown.
Issues identified
Key to these issues was the fact that our client had structures and estate planning in place to protect their assets. We had concerns about the risks of holding the equity in their home in the wife’s name and the property in the husband’s name. The goal was to remedy this without incurring significant transfer costs of stamp duty on the properties and capital gains tax on the investment property.
Solution
We arranged for an equity protection strategy and implemented the following:
- Establish a family investment trust controlled by the parents for the benefit of their beneficiaries (children, grandchildren and other family members). The trust structure designed to protect assets from potential creditors, bankruptcy and for future generation from a claim due to marriage/ de facto breakdown.
- Arrange for legal documents to gift the equity to the family investment trust without incurring tax costs.
- Implement legal documents, registrations and security documents to take a first mortgage over the properties.
This strategy achieved the same level of asset protection as transferring the properties to a family investment trust without incurring substantial taxation
costs. This also gave the couple peace of mind that the assets in personal names are also protected.
We were also keen to put in place a formal unit holders agreement to include the transfer of ownership to the surviving equity owners rather than transfer the ownership to the executor of the estate. This would occur at the time the estate is paid from the insurance policy in the event of death or disablement. The policies also owned by the appropriate structures to ensure tax efficiency.
The overriding thing to remember is that while accidents and incidents might happen in life, significant financial downside risk can be prevented with proper planning.
As a practicing accountant and financial advisor for over 20 years, I have heard of many other unfortunate business lawsuits, family disputes, financial setbacks which with some legitimate and sensible asset protection strategies could have been avoided.
Prosperity Wealth Advisers is one entity within the Prosperity Advisers Group which spans three office location.
Disclaimer: Prosperity Wealth Advisers ABN 32 141 396 376 is an Authorised Representative and Credit Representative of Hillross Financial Services Limited, Australian Financial Services Licensee and Australian Credit Licensee Ph. 1800 445 767. Any advice contained in this document is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Before making any decision, you should consider the appropriateness of the advice with regard to those matters. If you decide to purchase or vary a financial product, your advisers, our firm, Hillross Financial Services Limited, its associates and other companies within the AMP Group may receive fees and other benefits, which will be a dollar amount and/or a percentage of either the premium you pay or the value of your investments. Ask us for more details. If you no longer wish to receive direct marketing from us please call us on the number in this document and if you prefer not to receive services information from AMP, you may opt out by contacting AMP on 1300 157 173.
