Wrapping up step 4 of Becoming Financially Well Organised, we’ll be looking at asset protection plans for Loans owing by your entities as well as a handy checklist for your Asset Protection Plan.
Loans owing by your entities
One common mistake made by people in their asset protection strategy is thinking their assets are protected by using companies and trusts, however they forget about loans owing between their entities, or to them personally. There are two types of loans:
- Assets: those loans that are owing to the entity by another entity or individual; and
- Liability: those loans that are owing from the entity to another entity or individual.
A common scenario . . .
Company A has an asset being a loan owing by Company B and a liability being a loan owing to its shareholder, Jack. Jack owns both Company A and Company B. Company A is forced into liquidation due to economic circumstances and does not have sufficient assets to cover its liabilities, in fact, creditors are only able to be paid 50% of their amount that they are owed. Company B is forced to pay its loan back to Company A in full. However, the loan owing to Jack by Company A is unsecured and therefore ranks equally with all other unsecured creditors, so Jack only gets 50% of his money back. If Jack had provided the loan to Company A and had taken a charge over the assets of the company, then Jack’s loan would have been secured and he would have ranked higher than the unsecured creditors, and would have received significantly more than 50% of his money back, if not all.
Another area of risk is where passive assets are mixed with business assets in entities. Often the business premises are owned in the same entity as the business. If the business was to fail, then the property is also at risk of being lost. Using different entities enables the risk exposure of assets to be limited. By separating business assets from passive assets, you can protect the passive assets, provided the entities are appropriate and the transactions between them are correctly structured.
Checklist for your Asset Protection Plan:
- Limit the people in your family who have exposure to the debts of your entity or business. Do you both need to be directors?
- If the circumstances allow it and it is cost effective to do so, consider structuring the ownership of your personal and business assets into other entities such as trusts and companies. If you do this at the very start, you have the best structure from day one.
- Understand that partners in a partnership are jointly and severally liable for the liabilities of the partnership.
- Consider taking security over loans that you make to your entities or to other people.
- Keep your passive assets in a separate entity to your business assets. Sometimes it may also be prudent to separate different businesses or own business assets in a separate entity to the operating entity.
- Consider superannuation as an effective asset protection alternative.
To develop an effective Asset Protection Plan, contact FWO on 07 3833 3999 or email firstname.lastname@example.org