Asset Protection Strategy #1
By Chris Burnett
When clients are buying new assets often their first instinct is to just use an existing entity or structure within their group as a way to save on setup costs and/or maintenance costs associated with a new entity or structure.
Sometimes we inherit clients from previous accounting firms that have invested millions of dollars of property in the wrong structures because either the client didn’t want to part ways with an additional $1,500 to establish a new entity or the accountant wasn’t proactive enough to provide the right advice to the client at the time. Whatever the case may be, choosing the wrong entity can present unnecessary risks to assets and result in the client incurring significant costs that dramatically exceed those that would have been incurred had the client just establish and operate a new entity or structure.
If you put all of your eggs in one basket and the handle breaks – then all you’ve got is scrambled eggs. Similar advice can be followed in the art of asset protection.
Some assets are inherently riskier than others. For example, a discretionary trust that owns and operates a business will always generate a level of risk – we can never be sure what may happen in business in the future. If business debts cannot be repaid or if there is legal claim against the business by suppliers, customers or employees – these may easily exceed the realisable value of the business. Other assets are more passive and have little to no risks – such as cash assets, property and shares.
On a broad level, assets that are low risk should not be purchased by entities that already own high risk assets and vice-versa. Low risk assets should be purchased in a separate ownership entity and when it comes to high-risk assets these should also be separated between ownership entities when possible to quarantine potential risk. For example, a commercial business premises should not be purchased by the company that owns and operates the business. In this sort of situation, I would usually recommend that the property is purchased in a separate legal entity and then leased back to the entity that operates the business. In another example, a share portfolio shouldn’t be purchased by ownership entity that has a commercial property if avoidable as even a property can present some ownership risks – especially if there are significant loans secured by the property.
Separating assets among different ownership entities helps protect our assets under the separate legal entity principle. Only assets held by an entity are available to lenders or creditors to be used to extinguish the debts or obligations of that particular entity. In other words, if something goes wrong in one entity you want the least amount of assets available to potential creditors to get their hands on.
If you would like a review and assessment of your asset protection measures within your group and structures or need help restructuring please contact me.