Asset protection strategies – why early planning matters

Posted by Luke Mitchell on 16 March 2017
Asset protection strategies – why early planning matters

Our previous blog focused on the importance of the right business ownership structure as an effective asset protection measure. In this blog, we focus on the timing of the acquisition and disposal of assets as a critical element of any asset protection strategy.

As we identified in our last blog, while there are certainly steps that business owners can take to structure the ownership of their business in order to maximise the protection of their personal assets, no ownership structure, no matter how complex, offers absolute protection.

An effective asset protection strategy requires more than an appropriate ownership structure. It also requires very careful consideration as to the who and how of asset ownership.

Ideally a business owner should hold minimal assets in their own name. Acquiring assets in the name of a spouse, a company, or through a trust should be considered. However, this of course assumes that assets are either acquired after the person has become a business owner, or at least after the risks of holding assets in their name has become apparent to them.

What about those assets already acquired and held in the business owners name?

The short answer is that in order to maximise the likelihood that those assets will be protected in the event that the business fails, the assets should be transferred to a third party at the earliest possible opportunity.

In the event that the worst should happen and the business owner ends up bankrupt, all of the business owner’s property will vest in their trustee in bankruptcy. This includes any inheritance the business owner may receive during their period of bankruptcy.

A trustee in bankruptcy has the ability to reverse transactions involving the former assets of a bankrupt. Some examples of the transactions that can be reversed include:

  • The transfer of an asset that occurredless than 5 years before the commencement of the bankruptcy, where the transfer was for no consideration or for a sum less than market value – e.g. the transfer of an interest in the family home to a spouse for a nominal sum;

  • The transfer of an asset to a related entity (typically a close family member) that occurred less than 4 years before the commencement of the bankruptcy, where the bankrupt was solvent at the time of the transfer – irrespective of the price paid. However, if the price paid represents fair market value, the transaction will almost certainly stand;

  • The transfer of an asset to a (non related entity) third party that occurred less than 2 years before the commencement of the bankruptcy, where the bankrupt was solvent at the time of the transfer. Again, the price paid by the third party will be critical; and

  • Any transfer of an asset, occurring at any time, where the main purpose of the transfer was to prevent, hinder or delay the asset becoming available to the bankrupt’s creditors.

The above examples illustrate why it is so important to be proactive and take steps, as early as possible, to reduce the assets held in the business owner’s name. The specific time limits identified above are strict time limits – so the earlier an asset is transferred (and the more that is paid by the recipient of the asset) the more likely it is that the asset will be safe from a trustee in bankruptcy. Similarly, the earlier that an asset is transferred (and again the more that is paid by the recipient of the asset), the less likely it is that the transfer was done for the purpose of defeating creditors,  as opposed to the transfer being for the purpose of minimising future risk.

We place great value on our role as trusted advisers to our business clients and specialise in providing clarity and confidence to business operators. Contact us today to discuss putting in place the right asset protection strategy for you.

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