Case study: This is an asset protection tale with a happy ending. An SME owner – whose business is still thriving – has regularly made large superannuation contributions over the years to his self-managed fund. As well as investing in shares and term deposits, his super fund owns the premises occupied by his business.
Outcome: Philip de Haan, a Sydney tax and superannuation partner of Thomson Lawyers, explains that if the business ever fails, this SME owner’s superannuation savings (including his business premises) are inaccessible to creditors. This is the position even if he gives personal guarantees for the business’s debts.
De Haan regards superannuation as the best form of asset protection because its protection, with certain limitations, is enshrined in government policy as reflected in the bankruptcy legislation. And significantly, there is no dollar limit on the asset protection of super.
Assets held in a super fund are legally inaccessible to trustees in bankruptcy – provided contributions were not made with the main purpose of defeating creditors.
Lessons: Make the most of the asset protection of super. De Haan emphasises that if the business owner in this case study had not saved in super yet and had later become bankrupt after personally guaranteeing the business’s debts, he could have lost everything – including the business premises.
In any case, de Haan says it is not advisable to hold a business’s premises in the same entity that carries on the business.
Case study: An SME owner gave personal guarantees for his business’s debts. The business later failed and he is being chased for its debts. As an ill-fated asset protection strategy, he holds his personal savings in a discretionary trust under his control.
Outcome: His personal assets are under threat despite the fact that he his not a trustee of the discretionary trust. Philip de Haan of Thomson Lawyers points out that the Federal Court found in the much-publicised Richstar case six years ago that a beneficiary who effectively controls a trust has an interest in that trust.
Lesson: “The lesson is that at-risk people shouldn’t control a discretionary trust,” says de Haan.
He says the core asset-protection advantage of discretionary trusts is that the trustees own the assets, not individuals. (See case study two regarding the importance of having a corporate trustee of a discretionary trust rather than individual trustees.) De Haan regards discretionary trusts as possibly second only to superannuation for providing asset protection.
Case study: A newsagent transferred his half share in the family home to his spouse for a token amount four years before being declared bankrupt after the business failed. At the time of the transfer, his business was doing well. His trustee in bankruptcy then sought to clawback his former share in the home to distribute the proceeds among his creditors.
Outcome: The trustee in bankruptcy succeeded in recovering his half share although the house was entirely in his spouse’s name.
Insolvency specialist Stephen Mullette, a director of Matthews Folbigg Lawyers in Sydney, explains that a trustee in bankruptcy can recover a bankrupt’s share in a home if it was transferred for less than market value up to five years before the beginning of bankruptcy. This is the position even though there was no attempt to avoid creditors.
And a trustee in bankruptcy can seek to recover, without a time limit, assets transferred with the main purpose of defeating creditors.
Lessons: Mullette says the lesson here is for a low-risk spouse to pay market value for an asset when making a transfer as part of an asset protection strategy.
Given the Cummins case – discussed in case study three – it is crucial to establish that a couple intends for the low-risk spouse to own the home.
Mullette believes that, generally speaking, the fact that a spouse transfers his share of a home to a low-risk spouse generally would be enough to demonstrate the couple’s intention that the property was to be fully owned by that spouse. (Particular circumstances were involved in the Cummins case.)
However, Mullette says that when a home is initially bought solely in the name of the low-risk spouse, it may be beneficial for the couple to have a deed setting out their intentions. The deed could also state that any money the husband is contributing to his wife is a gift. “This is to avoid the risk of a court inferring that the intention was for each to have a half interest in the property,” he adds.
Mullette says it is quite common for bankrupt business people to lose their home if adequate asset protection strategies had not been adopted.
Case study: An entrepreneur went bankrupt after his business collapsed and the trustee in bankruptcy is pursuing his interest in several investment properties jointly owned with his non-bankrupt spouse.
Outcome: This action is not yet concluded but Stephen Mullette of Matthews Folbigg Lawyers makes the point that ownership of the properties could have been preserved had the properties been held in a correctly structured discretionary trust. (See case study two regarding the importance of having a corporate rather than individual trustees.)
Lessons: Consider holding at risk assets in a discretionary trust. Mullette describes the use of discretionary trusts as a simple way of separating yourself from your assets to gain some degree of asset protection.
Mullette says there is no “bullet-proof” strategy to protect your assets from creditors. And he emphasises that there is no transaction that cannot be effectively pulled apart, depending upon the circumstances.
