The top 5 issues with asset protection

Asset protection seems to be a recurring topic with clients over the past few months.

Although we are not lawyers the same issues seem to crop up.

So let’s have a look at the top issue of asset protection that every property investor should consider:

1. Should I have a will?Will

The answer is yes if you want to control who gets what and not leave it to the government or the courts.

A will is only activated after death.

People should also consider writing up an Enduring Power of Attorney which identifies someone to make decisions for them if they are incapacitated (i.e. still alive but maybe in a coma or mentally ill).

This type of document can also include what medical treatment you want and who will make these decisions.

2. What does my Will cover ?  

Wills only pass on assets that are in your name i.e. your estate. 

Your will also appoints who you want as executor/s, who will then carry out your wishes.

Executors take on a legal responsibility, so the nominated person can decline, maybe after your death,  so it is a good idea to have a fall back person/s.

The executor can only carry out what you say in your will and not what they think you wanted.

It is therefore imperative that you carefully consider your wishes and have them properly documented.

If you have a financial binding agreement (pre nuptial) then you must note that on death your will takes precedence and without a will then the distribution of your estate will be as per government legislation.

3. Non Estate Assets

These are assets not in your name.

These principally include your superannuation and Assets in a Trust. legal law

For superannuation, normally a Binding Death Nomination (BDN) is made where you advise the trustee of the super fund and what you want done with your super assets.

Typically it directs the super assets to go to your estate and be handled Via your will or to go to people/s direct.

You can even keep the funds within Super for someone else’s benefit.

Without a BDN the superfund trustee has to authority to distribute as they please within limitations e.g. your estate or to dependents.

Care is needed as many BDNs can be easily overturned by the courts if someone objects that they did not get something or enough.

Also note that divorce or marriage does not necessarily delete the operation of a BDN.

There are also tax implications depending on who Super money is distributed to on your death.bag money coin deposit saving save house property tax

In summary your spouse or financial dependents receive monies tax free but non tax dependents such as adult children may have to pay some tax on some of the distribution.

For assets in a trust you need to pass control over to someone

Control comes from the position of an appointor of the trust and a Memorandum of wishes should be prepared identifying who will become appointor on your death.

If you have a company as trustee then the shares (estate assets) in that company will need to be distributed on your death.

The new appointor can then decide to keep that company as trustee and if they are also the shareholder (your will passed the shares to them) they can then appoint themselves as directors.

In this scenario legal title of assets held by the trust e.g. a property does not change and so it can be much easier managed on your death.

4. Type of will?

Typically people prepare a will and send assets to individuals.

These new owners now own the assets.

There is no CGT or stamp duty on transfer via a will.

These new owners now have assets in their name.

If they get sued or divorced etc then they can lose the assets.

Children who receive income or capital (and then sell) are heavily taxed i.e. 66.5%- 46.5%.   

An alternate is a testamentary trust which identifies the assets and instead of going to the person, the assets go to a trust and the person you wanted to get the asset now is made appointor i.e. controller of the trust.

They control, not own.

You could instruct the executor to set up a company as trustee with the shares owned by the person.

As the individual person does not own the asset but merely controls the assets issues of bankruptcy and divorce maybe sidelined.

Children who receive income or capital from a testamentary trust are taxed at normal adult rates.

The testamentary trust is written but not signed and forms part of the will.

Your executor signs the trust after your death.

There is no CGT or stamp duty for assets going to testamentary trust on your death.

You can have multiple testamentary trusts with different assets going to each and then different individuals controlling the separate trust or have it all combined.

5. Capital Gains Tax

The use of a testamentary trust can also be useful if you leave an asset e.g. a property to multiple people where some may want to “take the money and run”.

In this case as the owner does not change i.e. the trust then as someone is bought out there would normally be no stamp duty on the change in control.

CGT would still apply.tax_time

If the recipient of an asset sells then CGT is calculated differently depending on the original acquisition date of the asset.

If the asset is a pre CGT asset then its cost base changes to its market value on date of death and if sold then it is now subject to CGT based on the increased cost.

If the asset is a post CGT asset then cost base stays the same and if subsequently sold the Capital Gain is the same as if the original owner had sold.

The tax paid in both circumstances is the marginal tax rate of the recipient.

If a principle place of residence is passed on it can be sold within two years with no CGT impact.

Want more of this type of information?

Ken Raiss


Ken is director of  Metropole Wealth Advisory and gives independent expert advice for high net worth individuals and their families, professionals and business owners. He is passionate about property investing and small business and shares his wealth of experience in his blogs. View his articles

'The top 5 issues with asset protection' have 1 comment

  1. September 2, 2013 @ 11:36 pm Carmel

    That info re Trusts is all very well.

    But the problem is, it’s almost impossible for an elderly Director to get investment finance for a Trust that has both assets and income, whilst still making sure that the Tax Man doesn’t get more than his share.

    Any suggestions? I have tried everywhere. It’s frustrating to see so many opportunities, having spent 17 years rebuilding to this point (with a Trust for our disabled son) after losing everything due to the failure of our 28-year-old family business. (Like idiots, we spent all that time financing our Aviation business’ growth by using what should have been profits).

    Also like idiots, we bought and sold 8 properties at various times to get over the “growth-humps” involved in going from $9-17 in the bank and one hired single-engine aircraft to operating 22 single and multi-engine aircraft (12 of them our own) and turning over just under $200,000 per week – all still with a bank overdraft of only $35,000!! Our “accountant” – as we are now only too aware – was good at mathematics, and that’s about all. As professonal pilots, good at our own job, we didn’t know not to leave the “finance stuff” to him.

    We firmly believed throughout that the banks would eventually support us, but we were in the “wrong business” for that. They didn’t, and we ended up on a monstrous treadmill that couldn’t stay liquid without a “useful” overdraft.

    I mention this only so you can see that we have been through the mill of a long-surviving business in a tough and competitive arena, lost everything at an advanced age, and started again from scratch to secure some sort of future for our son. We want to start investing again now, and set him up in a more intelligent way – but find yet again that the banks won;t lend for same – even though our son’s Trust now owns a house in Gladstone worth $500,000, with a mortgage of only $160,000, and rented (upstairs only) for $650 per week by excellent tenants who have signed an agreement to pay $800 per week once we finish renovating the downstairs so they can move in there as well.

    We estimate that it would cost only $25-$30,000 to finish the work, and the mortgage bank (Wide Bay) won’t lend us even that – quoting the government’s new “responsible lending” laws. They are also still charging us 6% interest, and say they COULD come down to 5.9% ONLY if we fixed the rate – obviously expecting a windfall in break fees if we did manage to refinance.

    I have written twice to Rolf and once to Michael Yardney, and tried brokers and banks galore. Always the same polite answer, but no positive results.

    I have never been one to sit back and wait for luck to sort things out, but I am running out of time and options. Even beggars in Calcutta have the opportunity to borrow to escape their situation. Ditto in China. What is wrong with this country?? Pretty soon, if they keep starving the “engine-rooms” of funds, the “smart ones” won;t have any small businesses to “feed off,” and the whole caboodle will stall.

    Do you know of anywhere trustworthy where our Trust could borrow to invest while there is still time?

    Carmel Piccolo


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