Securing your Business, Protecting your Family

• August 2005

Protection against Business Risk

There is inherent risk in any business venture, but this risk need not impact on your family or your family's personal assets and wealth. Recent major corporate collapses both in Australia and overseas, remind us that no one is immune from business failure. Furthermore, adverse litigation causes 6% of personal bankruptcies, an often completely unforeseen and unplanned for event.

However, the early adoption of an appropriate asset protection strategy can help to protect personal assets from the impact of business failure, or being sued for professional negligence, damages or from some other unexpected event.

Insurance Policies - Are you covered?

The most straightforward and widely used approach to risk management is the insurance policy. However the current market requires vigilance to ensure you are fully protected.

Until recently the insurance market has being competitive, and insurers were more likely to enhance coverage to boost their policies. In the present climate however, restrictive adjustments are being made, especially were business activity is involved.

For example, policies covering a home business, or a hobby farm that is involved in some form of business activity, may now not include built-in public liability insurance. While this is standard in most ordinary home insurance packages, where business activity is involved separate public liability insurance is needed. This will limit exposure to the risk of being personally sued for damages, which could result in bankruptcy.

It is important not to take for granted what is covered by your policy. This is especially the case where business activity is involved, as this area has been subject to numerous and perhaps increasing restrictions.

Asset Protection Strategies

There are many options available to effectively protect assets, such as your family home.

Some common asset protection options include:

  • Conducting a business via limited liability entities;
  • Alienating assets in asset holding entities such as discretionary trusts;
  • Transferring assets into the name of a spouse or asset holding entity;
  • Holding assets and conducting a business in separate legal entities;
  • Extinguishing personal security and guarantees provided;
  • Increasing superannuation contributions.

All these options contain advantages and disadvantages. The important thing is to select the appropriate strategy for your individual circumstances. For instance, while increasing superannuation is very effective in terms of asset protection, it means a loss of control over the funds until retirement.

One common strategy, which retains indirect control over the assets, is to transfer property to a family trust or into the name of a spouse. This has substantial benefits, such as minimizing transaction costs such as stamp duty (although such costs may be incurred by the trust or spouse). However under this strategy a family home may no longer be exempt from Capital Gains Tax.

One solution to this problem is to place the family home in a tenant- in- common arrangement, where the partner involved in business activity owns 1%, while the partner incurring no risk owns the remaining 99%. The remaining family assets could be secured in a trust, or in the name of a spouse. In the event of bankruptcy a creditor would only be entitled to the 1%, and could be prevented from selling the house. However such a strategy would have to be implemented well in advance of the threat of insolvency, as the Bankruptcy Act allows for creditors to claw back assets that have been given away up to five years before bankruptcy. They may also claw back assets that were transferred for less than market value, or where it was intended to elude creditors.

The best time to consider your asset protection strategy is now!

Another option is to conduct business as a separate legal entity or corporation. This protects your personal assets, while allowing you to retain control over them. You can transfer all your company or business assets into the name of the corporation, and control them as a director of the company and majority or sole shareholder. In the event of insolvency it will only be the assets owned by the corporation that are available to creditors, as the liability is not your own but the companies.

It is important to remember that the laws that impact on asset protection strategies change constantly, as do an individual's circumstances. It is therefore necessary for strategies to be regularly reviewed.

The Risk in Risk Strategies

  • In considering which strategy to adopt, it is important to consider that implementing an asset protection strategy may have its own risks. For example, the transfer of assets may be void if transferred for:
    Less than valuable consideration.
  • The purpose of defeating creditors;
  • At a time when the business or individual was insolvent;
  • Or within a specified timeframe of insolvency occurring, which could be up to five years.

Also assets that accumulate in separate legal entities may not be protected if they accumulate purely as a result of physical or mental exertion of an individual. Transferring assets may incur costs such as stamp duty and tax, and taxation exemptions and deductions may be lost.

An important risk to be considered with many strategies, is that of relationship breakdown. If property has been transferred to a spouse, there are provisions in the Family Law Act for reversal, but it may require a lengthy legal process. Therefore it is desirable for your adviser to possess a detailed understanding of the Family Law provisions.

Many issues may need to be considered when formulating an appropriate asset protection strategy, and numerous questions need to be considered with regard to future expectations, growth planning and funding, as well as other issues such as succession planning and revision of Wills. In all instances, timing is critical. The best time to consider your asset protection strategy is now!

This publication contains general information only. It is not provided as legal advice. Professional advice should be taken before any course of action is pursued, or any information herein relied upon.