The last thing you want to happen is that you work hard throughout your whole career, invest successfully and then lose a large amount of your wealth due to an unexpected event. Therefore, asset protection is just as important as asset accumulation. Asset protection is a subject that most investors fail to consider, don’t get good advice on and/or take the wrong advice. The goal of this blog is to give you an overview of the key risks people typically need to consider and what to do about them.
Be careful who you ask for advice
Over the past few months I have come across a few people that have paid a lot of money (over $5,000) to lawyer or accountant for asset protection advice. In every case, they ended up with a complex and convoluted structure which they arguably didn’t need.
My advice is simple. Get independent advice before paying anyone a lot of money for asset protection advice. Someone is independent when they have no asset protection services to offer you other than their advice. Independent financial advisors are typically the best source of advice as they rarely set up structures (such as companies and trusts) or provide legal services. That is, they have no vested interest in the advice given.
Asset protection risk: Self employed
If you are self-employed, you might be exposed to additional risks. There are two important points to consider:
- Firstly, your risk is that you get sued. You must ensure that you have the correct business insurances in place including, product liability, warranty and indemnity, business interruption, WorkCover insurance, professional indemnity, public liability and so on. Also, you must ensure that your business is structured correctly so that your liability is limited (e.g. trading company with the shares owned by a discretionary trust). Make sure that you don’t leave any retained profits in the trading company – the company must have as fewer assets as possible.
- Secondly, typically, there are only two risks that directors of companies can be held personally liable for being; trading whilst insolvent and not maintaining a safe workplace. Therefore, if you are a director of a trading company make sure you receive up-to-date financial reports and if you don’t understand them, ask questions or get advice. If your business maintains a higher risk workplace (e.g. manufacturing, construction, etc.), make sure you are confident that you are maintaining a safe workplace.
Asset protection risk: Occupational risks
It is true that certain occupations carry a higher level of risk. A good example is obstetrics because an error or mistake whilst practicing could result in a lost life. Even so, it is important to consider the depth and history of professional indemnity insurance cover. This cover is typically very deep, and the experience of personal loss is very limited – almost non-existent – even for the highest risk occupations. The most likely situation where personal loss could be experienced is if one’s actions were considered ‘criminally negligent’. Therefore, if you conduct yourself in a prudent and professional manner it is probably unlikely that you need to be concerned about suffering loss because of your occupation.
Asset protection risk: Property investors
Property investors could be exposed to additional risks such as a tenant or guest suffering an injury whilst attending your property. Also, certain properties carry higher risks such as unsafe balconies and properties with pools.
Therefore, it is important to maintain adequate landlord insurance as this will provide public liability cover, damaged caused by tenants, loss of rent, legal fees and so on.
Asset protection risk: Relationship breakdowns
In Australia, approximately one-third of marriages end in divorce. Therefore, statistically, this is probably your most significant asset protection risk if you are married or in a de facto relationship. The family court has very wide-ranging powers and will typically look through structures such as companies, trusts and super funds. So, those asset protection measures won’t work here.
Whether you are considered to be in a de facto relationship depends on your individual circumstances. The things that will be considered include the length of the relationship, whether you are cohabitating, the sharing of household chores, amalgamation of finances (sharing of income and expenses, joint assets, etc), existence of children, common friends, sharing pastimes and so on.
The best thing you can do before entering into a de facto relationship or getting married is enter into a Binding Financial Agreement (BFA). A BFA is a document that stipulates each party’s entitlement in the event of a relationship breakdown. These are often referred to as pre-nups (or pre-nuptial agreements). SBS’s program, Insight recently aired an episode about BFAs which featured lawyers and couple’s discussing the legal and practical issues. It was very informative – click here to watch it online. You can enter into a BFA at any time – even after you are married.
Going through a divorce can be an emotionally and financially painful experience. One of the problems is that the court system was designed about 1000 years ago to resolve commercial disputes. They were not designed to adequately deal with family matters. Therefore, a new approach to resolving these matters is becoming more popular and it’s called collaborative law. Many people believe the adversarial legal system can sometimes aggravate, exacerbate and elongate the divorce process causing more emotional turmoil and large legal costs. The collaborative legal process aims to reduce any friction between the parties and mediate an agreement that both parties feel comfortable with. There are various legal practitioners that are trained in and practice collaborative law. It may not always be possible or appropriate to engage in a collaborative process. However, perhaps in addition to entering into a BFA, your partner and you can agree to engage a collaborative process in the event of a relationship breakdown.
It should be part of your plan
Asset protection must be considered when formulating your financial strategy. This is one of the benefits of engaging a holistic financial advisory process. That is, there are many factors that need to be considered as a lot of factors are interrelated. The key factors that holistic advice must include are cash flow management, investment strategy, asset selection, asset protection, risk management, insurances, estate planning and wills. A well-rounded independent financial advisor should be able to address all these considerations and, where possible, avoid unnecessary complexity and cost whilst ensuring nothing is missed (often with the assistance from a trusted network of other advisors). Of course, if you need help don’t hesitate to reach out to us.
Please note: The above blog is general in nature. ProSolution Private Clients is not licensed to provide legal advice. Please do not act on any of the information above without first obtaining specific and personalised independent legal and financial advice.