Everything You Need to Know About Asset Protection
Protecting assets against creditors is becoming increasingly important for individuals who are exposed to legal risk through their business or profession. Asset protection strategies can help individuals to insulate their assets from a wide range of legal risks, including insolvency, legal action, and relationship breakdown.
Why is asset protection important?
Asset protection is important for business owners and professionals who wish to safeguard their assets against third party claims. Any business involves various elements of legal risk, including potential non-compliance with legislation, taxation issues, and legal claims against the business. Asset protection strategies can help individuals to separate personal or key business assets from the potential liabilities associated with the operation of the business.
Professionals are also placed at greater risk of legal action due to the nature of their work. For example, medical professionals may be sued by a patient for a matter which falls outside the scope of their professional indemnity insurance coverage.
Key considerations
Ownership of assets
Asset protection strategies must consider which party owns the assets, which parties are the most at risk, and how the assets can be separated from the at-risk party. For example, if an operating business relies on ownership of intellectual property rights, these assets may be transferred to a separate, related entity. Similarly, if a couple is purchasing a house and one member of the couple is a professional, the house may be owned by the member of the couple who is not exposed to legal risk.
Relationship breakdown
Asset protection may also be important for those who have accumulated assets before entering into a de facto relationship or marriage. A binding financial agreement is an agreement between parties to a marriage ore defacto relationship which governs how property and assets will be divided in the event of a relationship breakdown.
Bankruptcy
It is important to consider the implications of bankruptcy laws on asset transfers to other entities or individuals. If a bankrupt individual transfers assets to another party that would have formed part of the bankrupt estate before going bankrupt, the bankruptcy trustee can apply for orders to void the transaction and ‘claw back’ the assets. transferred. The potential effect of bankruptcy must be considered in asset protection planning, as this may limit when assets can be transferred.
Business structuring
Business structuring can help quarantine business risks, and protect assets. For example, assets may be held by an entity separate to the operating business, or the business may operate through a trust. Read more about business structuring here.
Estate planning
Estate planning is arranging financial affairs and assets so that an individual (and beneficiaries after their death) are adequately provided for. Asset protection can help individuals ensure that you they are prepared for retirement, adequately provide for dependants after their death, and prevent their estate from being unnecessarily eroded after their death.
A strong asset protection plan considers the present circumstances of the business or individual, and optimises protection against legal claims in the future. It is imperative that an asset protection plan is implemented for the long term, and considers all potential sources of future legal liability.