‘Asset protection’ is the phrase given to strategies that seek to keep assets out of harm’s way.
If someone successfully sues you, and you hold an asset, then the asset is available to meet their claim. In short, they can take the asset.
If, on the other hand, the asset is held by someone else, then the asset is ‘out of harm’s way’. The asset has been ‘protected’.
There are a number of key assumptions that underlie the whole concept of asset protection.
Do you have anything to protect?
To start with, if you are sued and you don’t have anything, then you haven’t protected anything.
This may seem obvious, but it’s a concept that’s really important to understanding why some people think asset protection is not a legitimate strategy.
The whole concept of ‘asset protection’ assumes that you would have had something for the other person to get, BUT FOR the strategy that put the asset out of harm’s way.
Some people don’t think it’s legitimate for you to take measures to put your assets out of harm’s way.
How can you protect your assets?
There are two ways you can avoid holding an asset, i.e. how you can implement asset protection. The first is simply to not acquire the asset in the first place, (i.e. have someone else acquire it). The second is transferring the asset from yourself to another party.
The first strategy is always the best, i.e. avoid acquiring the asset in the first place. If you do not own the asset, and never have owned the asset, then there is little the creditor can do. You are a ‘person of straw’, as the saying goes. (Note, there are complex bankruptcy rules about assets you have helped others to acquire.)
The second strategy of transferring assets out of your name to be held by others is more problematic. This is because our bankruptcy and corporate insolvency laws have ‘claw back’ rules whereby a creditor can demand the assets back from the person you transferred them to. There are limits on when a creditor can do this, but this is a risk you are still left with after you have transferred the asset.
So, who is going to hold your assets?
The next thing to consider is who is going to hold your assets. We have seen many people put in place an ‘asset protection’ strategy of having another person acquire and hold their assets – only to have the other person walk away with their assets, or lose the assets to one of their own creditors. For example, we have seen wealthy parents hold property in the name of their children, only to see their children lose the asset to a de facto partner or creditor.
Many people use ‘trusts’ to avoid this problem. A trust requires the person holding the asset to keep it safe. A trust also means that a creditor of the person holding the asset cannot get their hands on the ‘trust assets’. In this sense, a trust is like a ‘cloud’ where the assets can be hidden (in plain sight).
Asset protection is a very complex topic, and this is just a taster. For more information on strategies to protect your assets, call 1300 654 590 for a no-obligation and confidential chat.