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This strategy still means the asset is held by the family, but the business owner is largely dissociated from it. Business owners have to be aware of the traps of taking this approach. If so, it could mean he or she and the home are exposed in the event of litigation. There are also estate-planning issues to consider. For example, if the family home is in the name of the unexposed spouse and he or she dies, leaving everything to the exposed spouse, the house would again be under threat if there is litigation. An alternative is to leave everything to the kids and give the exposed spouse the right to occupy the property for life via a will.
An alternate strategy to signing over the property to the unexposed partner is to undertake borrowings and to allow a related charge to be made over the main residence. This structure means very little equity in the home would be available to an external party.
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But as the value of the asset rises and the business owner builds additional equity in it, there will be greater exposure to potential creditors, so there is a need to periodically refresh the charge to ensure little if any equity is available to someone who sues the business owner. Another solution could be to use a trust to hold the home, but there could be tax implications.
A main residence owned by an individual is generally eligible for CGT and land tax exemptions. A further option is to use a service entity, which delivers asset protection and tax advantages. Typically, a business owner would create a service entity that owns assets to be used by the business such as premises and plant and equipment and provides labour to it as well.
Unless the business owner makes an unusual contribution to defeat creditors when he or she knows litigation is on the cards, superannuation has statutory protection from creditors. Progressively moving your private company and investment portfolio into a self-managed super fund SMSF can provide more control and flexibility over retirement assets than a corporate or other super fund.
The sooner the director or SME business owner begins safeguarding his or her assets, the better protected he or she and the family will be. Starting sooner can minimise costs. Another reason is the law. To ensure assets are transferred between individuals or structures for genuine reasons, there are many laws surrounding certain financial transactions.
If there are questions regarding the financial situation of the transferring party at the time an asset protection strategy is executed, it is possible that assets will remain exposed. However, a Will can only dispose of the assets that you own at the date of your death and if the value of these is eroded during your lifetime, there will be little if anything left for your beneficiaries to inherit.
Lifetime Living Trusts are specifically designed to protect your assets for you during your lifetime.
They give you the peace of mind that your estate can be passed on securely and intact to your spouse, your children and their bloodline, or other named beneficiaries, after your death. Once the Trust has been created, you can use it to 'ring-fence' your assets.
Most people will protect their home and their savings, leaving capital in their bank or other savings accounts for ongoing living expenses. Income from savings protected within the Trust can be paid directly into your bank account to supplement income from earnings or pensions. Just like a safety deposit box, assets can be added and removed from the Trust during your lifetime. If you have large expenses that cannot be met out of normal income, like a new car, holiday, or house repairs, the appropriate sum can be transferred to your bank account from the Trust.
You are named as the 'Principal Beneficiary' of the Trust and retain full control of the assets within the Trust while you are alive and have mental capacity. You are free to move home, or release equity from the Trust at any time.
- The Asset Protection Handbook How To Ringfence Safeguard Your Assets.
- What will a Living Trust do for Me?.
- A Gathering at Oak Creek?
As the Principal Beneficiary of the Trust, you have a guaranteed right of occupation in the property for the remainder of your life. The Trustees, usually your children, cannot evict you under any circumstances.
Opinion: Safeguarding your personal assets
You can direct the Trustees to sell the property and to buy a new property of your choice. If the new property you are acquiring is more expensive, the Trustees can only be required to buy the new property if the additional capital required is paid into the Trust by you. If you lose mental capacity If you lose mental capacity, the law states that you are no longer allowed to manage your own affairs.
Assets held within the Trust will then be managed by your Trustees on your behalf.
Opinion: Safeguarding your personal assets - Australian Institute of Company Directors
Your Trustees can effectively 'stand in your shoes' to make decisions on your behalf but these must be for your benefit. They are able to add or remove assets or use the income from the Trust to help you and improve the quality of your life. Assets held outside the Trust will fall under the control of the courts. Creating a Lasting Power of Attorney will enable the people you choose to manage the assets that you own outside of the Trust. After your death After your death, the Trust continues to work to protect your assets for your beneficiaries.
The Trust can continue to hold the assets safely within it, or pay them out to the specified beneficiaries. The Trust is extremely flexible after your death and has the potential to continue protecting your family for years from the date it was created.