How to protect assets in your own name

Australia is becoming a more litigious society with more people considering suing and more lawyers opting to take on their cases for no upfront fee.

While the number of lawsuits in Australia is growing, we're still a fair way from the situation in the USA, where people have a 33 per cent chance of being sued in their lifetime and a 10 per cent chance of being named in a law year in any given year.

Why is litigation booming?

The key question, however, is why is litigation booming?

The answer may be as simple as more lawyers and more wealthy people coupled with a general apathy towards wealth creation and a propensity to take it from others.

Of course, not all Australians share these traits which is a blessing.

Most Australians would not normally consider themselves vulnerable to litigation as they would not normally put themselves at risk and often have appropriate insurance as well.

But can you really expect insurance to pay without question if you're sued and how do you stop frivolous cases “just because they can” with lawyers eager to take on work on a no-win, no-fee basis?

Here are some examples 

Let's imagine a situation where a new graduate steadily moves up the ranks of production to become the Site Engineer where you now take on personal liability of Occupational Health and Safety. 

Or perhaps your children illegally download music or film.

Or you are underinsured and your house fire also damages next door which you become personally liable for part of the rebuilding of both properties.

We also need to consider that with more Australians frustrated with the share market and moving into the residential property there is increased risk from a tenant, their family, or visitor if they are hurt in your premises.

The potential areas of risk are endless and if you are in business the list exponentially increases especially if you have employees, you are in manufacturing, chemicals, health care, or transport, or if you are in a professional services environment.

Over the years you may have invested in your family home, shares, and residential property just to name a few, and the traditional ownership structure would likely be in your personal name.

But all of these assets are potentially at risk in the event of litigation against you.

What about trusts?

Yes, you may have purchased in a trust, but while these are protected from a personal claim against you they can be litigated from inside.

The Greeks were able to attack the city of Troy once they got inside the gates by using the Trojan Horse – this is similar to a trust being sued by a tenant, for example.

A popular asset protection technique is to sell your personal assets into a trust but this will trigger Capital Gains Tax, stamp duty (dependent on asset), and a need to refinance as the title changes if the debt is involved.

But all of these are expensive, time-consuming, and most problematic.

No one wants to wake up in the middle of the night gripped with concern, fear, or anxiety about whether they could possibly lose all of their assets.

An effective asset protection tool is debt because banks nearly always get paid first as well as their entitlements.

This is because banks have a first mortgage over your assets and these are ranked first in the payment schedule in any bankruptcy or request for payments such as from litigation.

Why not become a bank?

Therefore, why not act like the banks and put a mortgage against your assets?

Such a strategy involves transferring equity from an unsafe area (your name, business, trusts holding actionable assets) to a safer area such as a trust (no other assets that can trigger litigation).

What this means is that you are effectively moving money and as such would not trigger Capital Gains Tax or transfer duties.

Also, the title does not change and so no refinancing is necessary.

In this strategy, equity is gifted from the owner/controller to the Equity Transfer Trust™ and then borrowed back with a mortgage where documents are properly drawn up and executed.

Payment of this loan would be behind a bank's first mortgage, but ahead of unsecured creditors who are the ones that are usually trying to sue you.

Such a strategy could be adopted as part of your wealth creation and estate planning initiatives.

It also still leaves your equity available to use as security to borrow first mortgage funding for investments or other requirements and once in place it requires relatively minimal administration.

About Ken Raiss Ken is director of Metropole Wealth Advisory and gives strategic expert advice to property investors, professionals and business owners. He is in a unique position to blend his skills of accounting, wealth advisory, property investing, financial planning and small business. View his articles