Asset protection strategies play a key role in minimising potential risks associated with the assets. It should not be neglected if you hold significant wealth. Many Australians think that insurance coverage is enough to protect their assets from fraud or other issues. But the reality is that while insurance covers do provide some protection, they cannot fight all kinds of risks. This blog discusses the main importance of asset protection and what strategies you may consider to preserve your wealth.
What Is Asset Protection, And Why Is It Necessary?
Asset protection refers to protecting someone’s personal assets from being used to meet claims made by a creditor.
If you have made your wealth through your asset portfolio, your assets may risk getting lost. Especially if you are the business owner or if the authority sues you. Businesses always have various risks, like:
- The project is not going well
- An abrupt change in market trends due to emergencies
- Your inability to work due to severe health conditions
- A customer’s inability to pay your bills
- Change in government rules
A well-structured asset protection system helps business people to protect their businesses and their homes and families.
You may have insurance coverage, but it may not provide full protection against each possible scenario. So, along with the insurance, it is equally important to have proper wealth protection strategies in place.
The 3 Most Suitable Asset Protection Strategies
In addition to protecting your wealth, asset protection strategies can be beneficial in any business circumstance. There are three best wealth protection strategies that you must consider while running your business.
Discretionary trusts
A trust is a business structure where a legally recognised relationship exists between the trust beneficiaries and the trustee. Here beneficiaries will be benefited from the assets that the trustee holds.
- The most typical asset protection form is the trust because the trust is not a separate business entity like any other business structure such as a company or a sole trader. Every trust asset is held in the trustee’s name, and therefore while an individual or a company can be sued by the relevant authority, a trust itself cannot be sued.
- A discretionary trust is the most common type of trust formed in Australia, and it offers maximum flexibility in trust income distribution. In a discretionary trust, the trustee has full rights to decide how they will distribute the trust income.
- A typical form of discretionary trust used for asset protection is the family trust. Property investors and individuals use their family trusts to protect their assets because it maintains a separation between the beneficiaries and the trustee. Thus, beneficiaries cannot have any right to any property within the trust.
At the same time, you must also note that you can use a discretionary trust to purchase company shares, business interests, and investment properties. In a word, a discretionary trust can have its own creditors who can hold a property in the trust.
Before you move your personally owned assets into a trust, you must consider two important factors.
- The trust will own those assets.
- Transferring the assets to the trust will result in high CGT issues and stamp duty costs.
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Spousal ownership
If you operate a business in a high-risk industry while your spouse is not involved in any such professional or commercial activities, you can have your asset in the name of your spouse. Usually, if the spouse who owns a low-risk business is made the owner of the assets, your creditors will find it challenging to gain control of the property.
- So, if you hold any property in your name that you think is vulnerable to risks, you can think of transferring it in the name of your spouse. It will undoubtedly be an effective way to protect your assets.
Let us explain it with a real-life example. Suppose you recently started a partnership business with one of your friends. While your spouse is employed in a high-paying position in the corporate sector.
Running a business will always involve ups and downs, and if anything happens, your business creditors may claim against the family home you share with your spouse. Now, as your spouse is in a stable position in a high-paying sector, which involves fewer risks, you can consider transferring your family home in the name of your spouse. It will prevent the creditors from making any claim on the house legally owned by your spouse.
Business restructuring
If you are currently the owner of a business and hold assets like property in your name, you will be less likely to consider structuring your business as a sole trader or a partnership. The reason is that partners and sole traders are personally liable for the tax debts of their businesses, which means a business creditor can easily use your personal property assets when your business owes some debts.
On the other hand, you will be setting up a separate business entity if you choose a company structure. In that case, your company may be sued for uncleared debts. But the creditors cannot hurt your personal assets as long as there are no personal guarantees.
Starting a business under a company structure involves so many steps to follow. Besides setting up, you will also need to register and run a company and meet other legal compliance requirements. If you find it complicated, you can consult a business professional who can give you valuable advice on what approach to take for business restructuring.
Things you must keep in mind
In addition to all the strategies discussed here, you must keep in mind several other factors, too.
- Property portfolio structures will be different for every person, so it will be a good idea to discuss strategies that will suit your business requirements the best.
- Along with these wealth protection strategies, strategic tax planning is also a major requirement.
Who can help you?
Taxation and finance specialists are the best individuals who can help you in this regard. You may get in touch with any top-ranked tax firm in Perth .
