With the conclusion of Risk Planning, we are now onto step 4, bringing you a little closer to becoming Financially Well Organised. Step 4 is all about Asset Protection Plans, where we ask the question: Are my assets exposed?
An Asset Protection Plan covers the ownership structure of assets, ensuring they are owned in the right names or entities to limit the risk of exposure to creditors.
Transferring assets between entities can result in additional taxes such as stamp duty and capital gains tax. You must seek professional advice and understand the tax and other implications when you restructure your assets, whether they be owned in companies, trusts, partnerships or superannuation.
This week, we’ll talk about Companies and Trusts.
A company is a separate legal entity in Australia and governed by its Constitution and the Corporations Act 2001. As a separate legal entity, a company can own assets, run businesses, incur debts, sell assets, act as trustee, enter into a partnership, and so on.
A company provides protection to its shareholders as the company’s liabilities are limited to the company, and the exposure for shareholders is limited to the amount of capital paid on their shares.
In some instances, the Directors of the company can be held personally liable for the debts of the company. Some examples of this are where Directors incur debts when the company is insolvent, or where they have been fraudulent. Generally assets external to the company are protected from creditors.
Some important things to consider when operating via a company include:
- Couples often set up a company where they are the shareholders and Directors, even though it is usually only one of them that makes the decisions. By having both as Directors, their other assets outside of the company may be exposed, like the family home;
- The shares in the company are often held in individual names. If there is any action taken against the shareholders personally – that has nothing to do with the company or actions against them as Directors – these individually owned shares may be exposed, which could expose the assets of the company indirectly as the shares may need to be sold.
Trusts are entities which separate the control of an asset from those that enjoy the benefits of the income and capital of these assets.
These days there are many forms of trusts but they all have the same characteristic; separation of control from benefit. The most common type of trust is the Discretionary Trust or Family Trust. Most business owners have one or more of these trusts in their structure. One of the benefits they provide is the ability of the trustee to distribute income and capital to different beneficiaries from year to year. The Trustee decides who receives what amount in the given year and is the person who controls the trust, whereas the beneficiaries are the nominated people who receive the benefits of the trust. The Trustee in a Family Trust has the absolute discretion to determine who receives income and capital, if any, each time they make a distribution. Therefore, tax payable on income can be reduced by spreading the income across eligible beneficiaries.
Like a shareholder’s limitation of liability to a company’s debts, the beneficiaries of a trust are also protected from a trusts debt, and vice versa. However, when a trust is in trouble and there are unpaid distributions owing to a beneficiary, these amounts are not secured to the beneficiary and may be lost if there are insufficient assets from which to meet creditors claims.
To develop an effective Asset Protection Plan, contact FWO on 07 3833 3999 or email firstname.lastname@example.org.