Protecting your assets is crucial, especially if you’re a business owner involved in riskier trading activities. Asset protection strategies are arguably just as important as the acquisition of the assets themselves.
Many Australians aspire to own a variety of assets, including investment properties and businesses. However, there’s often a gap in understanding about the crucial need to protect these assets once they’re in your possession.
We’ve compiled a list of top asset protection strategies to guide you in securing your property.
Overview
Here are four key strategies to consider:
- Establish a Discretionary Trust: This can safeguard assets by keeping them legally separate from the beneficiaries, protecting them from creditors.
- Transfer Assets to a Low-Risk Spouse: This can shield assets from business-related risks.
- Restructure Your Business: Opt for structures like companies over sole traders to limit personal liability.
- Insurance: Comprehensive coverage is essential to protect against unforeseen liabilities and losses.
Each strategy has unique implications and it’s advisable to seek professional guidance to tailor them to your specific needs.
Why is asset protection important?
The primary objective of a thorough asset-protection plan is to avert or significantly diminish risk by shielding your business and personal assets from creditors’ claims.
Regrettably, many small-business owners lack awareness of the potential risks that could jeopardize their business and the protective measures available to them.
An asset-protection plan utilizes legal tactics, established before the emergence of a lawsuit or claim, that can discourage a potential claimant or aid in preventing the confiscation of your assets following a judgment.
If you haven’t already implemented your asset-protection plan, it’s advisable not to delay.
The longer the plan has been operational, the more robust it is likely to be.
Asset-protection planning strategies encompass separate legal structures or arrangements, such as corporations, partnerships, and trusts.
The structures that will be most effective for you largely depend on the nature of assets you possess and the types of creditors who are most likely to lodge claims against you.
Best Asset Protection Strategies for small business owners
Here are some top asset protection strategies you might want to think about using.
Setting Up a Discretionary Trust for Asset Protection
A discretionary trust is the most frequently used type of trust in Australia. With a discretionary trust, the trustee has full control over how the trust income is divided among the beneficiaries.
Discretionary trusts are usually used for asset protection and tax planning.
For instance, a family trust (which is the most common kind of discretionary trust) is often set up to manage a family business or hold a family’s personal or business assets.
The reason discretionary trusts are used as asset protection strategies is because the beneficiaries don’t have any rights to the property in the trust.
Not having any interest in the trust property means that if any of the beneficiaries have to pay a debt, a person or company the company owes money to won’t be able to get an order against the trust property.
Transfer your assets to a low-risk spouse
If you’re planning to invest in assets like property, and you’re involved in high-risk business or professional activities, it might be a good idea to have these assets owned by your spouse who is at a lower risk.
Usually, if your spouse owns the family home, your creditors will be unable to utilise it to pay off obligations.
Using Business Restructuring as an Asset Protection Strategy
There are several elements you’ll need to think about before choosing the best structure for your business. You can also check out our article on What is the best business structure in Australia?
When it comes to protecting your assets, you might want to avoid being a sole trader or a partnership. This is because sole traders and partners are personally responsible for financial or tax debts. In other words, assets that are in your name can be used to pay off business debts.
So, there’s no separation between business assets or personal assets, including your part of joint assets like your house or car.
Insurance
This is arguably the most straightforward of the asset protection strategies – all you need to do is ensure you have enough coverage to safeguard your assets from being used to pay off outstanding debts.
Having insurance can also protect your potential future earnings.
Consider choosing one or more of the following insurance policies along with the other asset protection strategies:
– Life insurance
– Business insurance
– Disability insurance
– Income protection insurance
Get in touch with our team at Blackwattle we can help assess your options and get you back on track to healthy operations.
Blackwattle Tax has a team of experienced Chartered Accountants that are ready to support you and your business. We have help countless families and businesses make informed decisions that have resulted in better financial and tax outcomes.
To find out how we can help you with your strategic business decisions, book a free consultant with us.
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Disclaimer: We endeavour to make sure the information provided in this guidance is up to date and accurate. Please note, that the information is only intended to be a guide, with a general overview of information. This guidance is not a comprehensive document and should not be interpretated as legal advice or tax advice. The information is general in nature. You should seek the assistance of a professional opinion for any legal and tax issues related to your personal circumstances.
