Asset Protection strategies

Asset protection is a philosophy and way of life

Asset protection is a lifetime pursuit. Asset protection is an ongoing journey. If you are truly ready to start the journey your life changes. Everything you do is tested against the best practice of asset protection.

Work through this information. You or your spouse, perhaps both, will cry. To get you in the correct mental state to begin reading these materials go to your bathroom. Go alone. Lock the door so you will not be disturbed. Look in the mirror and ask where your spouse and children will sleep tonight if you go bankrupt.

I hope these free resources start your lifelong journey of protecting what you own: your money and family.

Asset protection keeps assets out of harm’s way

Someone sues you. But they only get your assets. You have nothing. You are a ‘person of straw’. They cannot get the assets held in your 4 safe harbours:

1. ‘spouse of substance’ is your non-working spouse (do not worry, if your spouse leaves you the family court just directs some of the assets back to you)
2. ‘clean skin family trust‘ – only holds safe assets such as shares (does not hold risky assets like real estate. And does not hold very high-risk assets like businesses)
3. Self-Managed Superannuation Fund
4. Your dead parent’s Bankruptcy Trust in their Wills

Business owners risk bankruptcy and insolvency every day

Business owners – whether small or large – and professionals face constant exposure to lawsuits and insolvency. Professional Indemnity insurance companies often wiggle out of not paying. You bet the house on a successful outcome with every client who comes in the door.

Are small businesses less risky to go insolvent?

“My small business does not make much money. Therefore, it has less risk”. This is false. The amount of profit (or loss for that matter) is not related to the level of risk. A small business leads to the loss of your home and other assets – just as fast as a big profitable business.

Renting out real estate is a business and therefore risky

Renting out real estate is a business venture and carries risk. There are generally three levels of investment risk to consider: owning shares, which typically involves minimal risk; investing in real estate, which poses a moderate level of risk; and directly operating a business, which is associated with high risk. Renting out property, whether residential or commercial, falls into the high-risk category as it entails running a business. What we see at Legal Consolidated is that property owners are particularly susceptible to legal challenges, and their perceived financial stability can make them prime targets for frivolous lawsuits.

Sound legal foundation for asset protection:

Asset protection does not involve hiding or concealing assets. It is not about defrauding creditors. A properly constructed asset protection plan achieves your objectives while fully and truthfully disclosing all of your financial circumstances.

Discouraging Litigation:

In my younger years, I thrived in the fast-paced world of litigation. Whenever I considered initiating legal action, I posed two crucial questions: First, what is the likelihood of winning the case? Second, if we win, does the opposing party have the assets to satisfy a judgment?

It’s wise to deter potential lawsuits before they escalate. Typically, before filing a suit, a plaintiff’s lawyer will conduct a thorough investigation to determine if the defendant has assets that could cover potential legal judgments. This financial scrutiny involves identifying real estate, bank accounts, and other valuable assets. If the defendant possesses significant, accessible assets, the likelihood of the lawsuit proceeding increases. Conversely, if the assets are safeguarded or not easily liquidated, only a plaintiff unconcerned with the potential financial losses would decide to move forward with litigation. This strategy of asset protection can effectively discourage frivolous or financially driven lawsuits.

The benefits of controlling assets – not owning assets:

An important distinction to learn for asset protection (and taxation) is the difference between ‘owning’ an asset and ‘controlling’ an asset. Asset protection allows you to maintain control and enjoyment over the property – without the need for ‘ownership’. This strategy reduces your visibility as a target for lawsuits and creditors. By using legal entities such as trusts, companies, and partnerships, and owing money to ‘safe houses’ you effectively manage assets while keeping them out of your direct ownership. This shields your assets from legal claims but also optimizes your tax obligations. Essentially, control over an asset can often be more advantageous and secure than outright ownership, offering flexibility and protection in your financial planning.

To explain this I give my students this free training video to watch. This is because it highlights how an ‘appointor’ with no risk controls the family trust. But, the ‘trustee’ who suffers both high risk and no power ‘owns’ the asset. A family trust is a great example of control with no ownership or risk. If you have an appetite to learn even more about control of a Family Trust this further information helps.

Asset Protection for Wills and Estate Planning

Your Will should contain:

• Bankruptcy Trust – if children or grandchildren ever go bankrupt
• Divorce Protection Trust – preserve the capital from children divorcing
• 3-Generation Testamentary Trusts – each child and then your grandchildren have their own trusts. This reduces death duties such as Income Tax, Capital Gains Tax and Stamp Duty
• Superannuation Testamentary Trust – stops the 32% tax payable when your super goes to adult children
• Special Disability Trusts – in every 3-Generation Testamentary Trust Will

Protect Family Assets: Above all else, the asset protection plan accomplishes its primary purpose of sagely insulating and preserving family assets from attack.

Asset Protection – Strategies

1. Limit Liability in your Structure

The good time to consider asset protection is when you set up a business. The structure you choose and how you finance it influence the security of both your personal and business assets. Implementing strategies to minimise income tax, capital gains tax (CGT), and death taxes is also crucial for asset protection—here, it is the government, not just potential creditors, that poses a risk to your wealth. Common Australian business structures include:

A single person or couple:

* build a corporate trustee company to be the trustee of your family trust (preferred) (watch the Family Trust training course for free here)

*  build a company (to run the business through, not preferred)

* build a Family Trust where the company is the trustee of the Family Trust

Two or more families, e.g. brother and sister, or two unrelated persons

* build a company and a Unit Trust – the company is the trustee of the Unit Trust. The Unit Trust holds the business assets

* build a Family Trust for each Unit Holder. The Units  are held in each Family Trust

2. Having all your assets in one trust – ‘one bad apple’

One asset in a Family Trust that goes bad contaminates all the other assets in that Trust. There are two types of assets. “Unsafe” assets like business operations. And there are ‘safe” assets like shares and real estate. Don’t mix unsafe business assets with shares and property. Build two Family Trusts. One is for unsafe business assets. The other is for safe assets.

3. Add firewalls and levels of protection

If your entity lacks assets to pay debt, the creditor often seeks to access the director’s or trustee’s personal assets. Companies no longer provide much ‘limited liability’ – and none against the ATO. Many old company Constitutions force you to have two directors. You can convert to a Single Director Company. Then one of your directors resigns. For a trust, replace the human trustee with a company – this provides another firewall.

4. Business Succession Planning

One key person gets sick and dies. Their whole business may fall apart. Business Succession Planning is all about the remaining partners getting the sick or dead partner out of the business with a fist full of dollars for the grieving spouse.

see Succession Planning in your Family Trust

see Business Succession Planning

5. Bankruptcy Safe havens –
‘man of straw and woman of substance’

The three common safe havens are: ‘non-business spouse’,  Superannuation and a clean skin Family Trust (the Family Trust only has safe assets in it)

The ‘man of straw’ and ‘women of substance’ is a powerful strategy (please excuse the sexist language):

• One spouse takes all the risks: directorships, trusteeships and runs the business or provides professional services (like an engineer or doctor).
• The non-working spouse holds all the assets: home, bank accounts, shares and property. If they ever divorce all the assets are divided up by the Family Court. The ‘person of straw’ gets back their fair share of the assets.

Superannuation as a safe house – escapes bankruptcy

Assets in a superannuation fund and Self-Managed Super Fund are expressly excluded from the definition of divisible property. See section 116(2) of the Bankruptcy Act 1966. This means that individuals exposed to creditor risk usually have their superannuation account balances and entitlements protected in bankruptcy.

While a dependant of a deceased fund member usually retains protection of assets from creditors if the assets were paid via the deceased fund member’s “Legal Personal Representative” (LPR) into a 3-Generation Testamentary Trust, such creditor protection is only possible with a Bankruptcy Trust in a Will. If instead death benefits can be paid as a death benefits income stream, creditor asset protection is maintained.

What happens when business premises are held in an SMSF? There are taxation and other estate planning advantages. From an asset protection perspective, the principals of the business successfully separate the business premises from the risk of running a business.

Any guarantees, indemnities and security that directors and shareholders might provide for the business do not extend to the business premises. This is because of the business premises are held in the bankruptcy-protected SMSF.

6. Bankruptcy Trusts and Divorce Protection Trusts in your Will

Bankruptcy Trusts and Divorce Protection Trusts in your Will protect your children and grandchildren from attack.

Start building a 3-Generation Testamentary Trust read the hints and watch the training videos. As you go on this journey you will gain a lot of information and educate yourself.

7. Leasing out a property and setting up a ‘bed and breakfast’

You own a property. You decide to lease it out via a website. For example, Air B&B. Or you set up a ‘Bed & Breakfast’. There is risk in running a ‘business’ – any business. Renting out a property short term is a ‘business’. It carries risk. You take out all the ‘landlord’ insurance that you can get. But there is still a risk. The property together with all your assets, are at risk if something happens and you are sued. To mitigate or reduce that risk you can put in an ‘interposed entity’. Instead of you, the owner of the property, a company as trustee of a family trust rents out the property. This is how to set up that structure.

Can I move real estate into a Family Trust?

There is about 4.5% stamp duty and Capital Gains Tax when you transfer Australian real estate. So it may not be worthwhile to do this. Your accountant who is your partner in asset protection will do a cost-benefit analysis. An alternative is the Gift and Lend Back scheme, but they do not seem to work.

Alternatively, the Trust runs the ‘business’. And the Family Trust rents out the property from you. Or, if your SMSF owns the business real estate it can lease it to one of your business structures.

Can I move my family home into a Family Trust?

If you transfer your family home into a trust – such as a Family Trust – then you lose your CGT tax-free status on the family home. While you probably will not pay any CGT, the Family Trust is forced to pay transfer (stamp) duty. You may also start to suffer land tax.

If the family trust does not ‘own’ the real estate then where is the business?

The Family Trust owns the right to rent out a property. The owner of the property (you) enters into a long-term lease from you to the family trust. The family trust then goes out and markets the property to rent. The ‘asset’ of the family trust is the right to rent out a property.

Put shares and other ‘safe’ assets in my ‘trading’ Family Trust?

That is naughty and wrong. Remember Michael Jackson’s song: One bad apple spoils the whole darn bunch. Do not mix ‘risky assets’ (such as a business) with safe assets (such as shares). Instead, build a family trust for the ‘risky’ business assets. And build a separate family trust (‘clean skin trust’) for safe assets. Remember, as well as a ‘clean skin trust’ you may have other ‘safe havens’. These include your ‘non-working non-risk spouse’ and superannuation.

8. I am a professional with my own Professional Indemnity insurance

Do not rely on insurance to save you. First, insurance companies go insolvent. For example, HIH Insurance was Australia’s second-largest insurance company. It went insolvent. It is the largest corporate collapse in Australia’s history, at that time. Big insurance companies can and do fail.

Second, insurance companies (even if not for profit) may not want to pay out because that lowers their profits. You may act outside the scope of your profession. Therefore, your PI insurance cannot cover you. E.g. lawyer gives financial planning advice. E.g. an engineer gives interior design advice. E.g. GP gives medical specialist advice. E.g. a Dentist gives medical doctor advice.

Instead, it is better to have 1. good business systems 2. good business structure 3. no assets in your name 4. assets in ‘safe harbours’. Depending on the state, some professionals such as doctors, auditors and lawyers cannot share profit or operate through a family trust or a unit trust. Professional and business owners should:

• consider setting up a service trust agreement; and
• not have any ‘good’ assets in their own name.

9. Personal Guarantees

Banks and trade creditors love to lock in as many people as possible to secure the debt. You, your spouse, your mum and dad, your children are all useful cannon fodder to a lender. Often you spend years setting up your asset protection only to find the ‘safe house’ spouse signs an ‘innocent-looking’ piece of paper called a ‘personal guarantee’. At times this may be fine. For example, if your spouse is buying a house then it may be acceptable to guarantee the mortgage. But fight back.

We had one situation where (by mistake) Mum and Dad were both directors of a company. The bank demanded both sign personal guarantees for the companies’ new overdraft. We got involved and Mum refused to sign. Instead, they amended the company constitution to allow a one-director company. Dad then applied as a single director to the same person at the same bank. The wife was no longer required to sign a guarantee. The company got the overdraft.

Think twice before allowing the ‘safe house’ spouse to sign guarantees.

10. Does transferring assets to a ‘safe house’ work?

Sackville J in Prentice v Cummins (2002) 124 FCR 67 eloquently states:

“I am prepared to assume for the purposes of this case, without deciding, that if all that is known is that a professional person:

• • transfers the bulk of his or her assets to a family member for no consideration;
  • has no creditors at the time of the transfer (or retains assets sufficient to meet all liabilities known at that time);
    is not engaged and does not propose to engage in any hazardous financial ventures; and
  • intends to protect the transferred assets from any action brought by a client who might in the future sue for professional negligence (there being no such suit in the offing at the time of the transfer),

then s121(1) of the Bankruptcy Act does not render the transfer void against the person’s trustee in bankruptcy.“ [Italics inserted]

What does Prentice v Cummins teach us?

Sackville J’s remarks in Prentice v Cummins (2002) highlight the nuances of asset protection within the context of Australian bankruptcy law, particularly section 121(1) of the Bankruptcy Act. This section addresses the voidability of transfers made to defeat creditors. The judge’s conditional acceptance in this quote implies that transfers made under certain circumstances might not necessarily contravene the Act, provided they do not explicitly aim to defraud creditors.

Asset protection strategies must be implemented cautiously and within legal boundaries to avoid implications of fraudulent conveyance. In the context of the case, the conditions set by Sackville J underscore a scenario where asset transfer does not automatically assume an intent to defeat creditors, especially in the absence of current or anticipated financial troubles or claims.

This leads to a broader discussion on the timing and intention behind asset transfers. For instance, transfers executed as part of regular financial planning or estate planning, without the anticipation of insolvency or litigation, generally stand a better chance of being upheld in court. Conversely, transfers made in anticipation of legal challenges or creditor claims may be scrutinised and potentially reversed under bankruptcy laws. It is difficult to ‘get into the head’ of the person doing these transfers to understand what they intended. Instead, the trustee-in-bankruptcy and the court examine emails and file notes between the husband, wife, lawyer, conveyancer, financial planner and accountant.

Therefore, while asset protection is a legitimate practice, it requires a strategic and transparent approach, ensuring all actions are justifiable and compliant with the law. This careful balancing act can protect individuals and their assets without crossing into the realm of legal infringement. This was not the case in our next case, Wallace.

Wallace Case – bad bankruptcy law?

In Turner (As Trustee of Bankrupt Estate of Wallace) v Wallace [2016] FCCA 963 the transfer of an asset to a spouse did not work for asset protection.

Facts of the insolvency case of Wallace

Mr Wallace, an accountant by profession, became a company director of a new family business dealing with motor vehicle retailing. Around this time, he made a significant financial decision: transferring his interest in the family home to his wife. This move coincided with him taking on considerable personal liabilities, including responsibility for a financing arrangement with St George Bank.

A decade later, the business encountered financial distress and ultimately failed. In the aftermath, the trustee in bankruptcy initiated actions to ‘claw back’ Mr Wallace’s interest in the family home.

Mr Wallace and section 121

The legal basis for this action lies in Section 121 Bankruptcy Act. It targets transactions made by an individual who is or is about to become, insolvent and does so to defeat creditors. Section 121 seeks to nullify any transfers that appear to have been made to protect assets from creditors in anticipation of financial difficulties. For Mr Wallace, the timing of the transfer—proximate to him assuming significant debts and becoming a director—raised questions about his intent.

Under Section 121(4), the court needed to determine whether it could “reasonably be inferred from all the circumstances” that Mr Wallace was, or was about to become, insolvent at the time of the transfer. This determination is crucial as it impacts whether the transfer stands or falls within the purview of a voidable transaction intended to sidestep creditors.

The court’s handling of Mr Wallace’s case has faced criticism for a perceived lack of rigour in its reasoning, particularly in how it assessed his financial state and the timing of his liabilities against the transfer of property ownership. The court’s less-than-careful analysis highlights the complexities and nuances involved in such legal determinations and underscores the necessity for a thorough evaluation of all relevant financial details before making such a decision.

The decision of Wallace Case – section 121 Bankruptcy Act 1966

The Court held that the transfer of Mr Wallace’s interest in his home to his wife was void. This is under section 121 Bankruptcy Act 1966 (Cth).

Bankruptcy laws provide that if people seek to transfer assets to avoid an actual or impending liability, then the transfer is voidable.

The Wallace Court stated:

“Although I have found that the agreement upon which the wife’s defence rests is not made out, this does not, of course, mean of itself alone that the transfer to her of the husband’s interest makes the transfer void pursuant to s 121 of the Bankruptcy Act 1966 (“the Act”). The husband, after all, has denied that the transfer of the property was in any way designed to defeat creditors. He says he had no idea at the time that he would have any such creditors…

…Furthermore, although the wife denied it, I think the husband and the wife must have discussed this. It was a major alienation of property. It altered the legal ownership of it. There is, in my mind, no doubt that a couple happily married (and the wife was an intelligent woman and a businesswoman herself) would have failed to discuss the matter of so much moment. The underlying detail of the potential risks in Ripponlea Motors may well not have been fully disclosed to the wife but I have no doubt that it is more probable than otherwise that the intention and effect of the transfer was…

…Likewise, on the evidence I have no doubt that the husband’s main purpose in making the transfer was to prevent the transferred property from becoming divisible among his creditors should there ultimately be any. I make this finding in essence for two interrelated reasons. First of all, because I do not accept and indeed entirely reject the explanation that the wife and the husband have proffered. I do not accept that there was any representation or agreement as they have alleged.

Second, that explanation being rejected, no other explanation makes any real sense. It seems clear to me beyond doubt that in transferring the property to his wife the husband was protecting it against creditors even though he may or may not have had any active appreciation that there would be some. He was on any view very heavily personally committed to the business by the time the transfer took place.”

Legal Consolidated’s views on Wallace’s case

Consider section 121(4) of the Bankruptcy Act 1966. It requires a close temporal connection between the transfer of assets and the transferor’s insolvency. This section stipulates that it must “reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor is, or was about to become, insolvent.”

However, the Court in the Wallace Case adopted a narrow interpretation of this provision, focusing instead on the nature of the business Mr Wallace was entering. The court applied a ‘hazardous financial venture’ test, pinpointing the inherent risks for the motor vehicle retailing industry. The court used this characterisation to justify a significant 10-year gap between the transfer of Mr Wallace’s home to his wife and his bankruptcy a decade later.

The Court reasoned that since motor vehicle retailing is considered a risky business, it was plausible to expect that Mr Wallace might face financial failure in the future. Thus, the transfer of his home at the start of his business venture was seen as a preemptive measure to protect assets from future creditors, even those not yet ascertainable. This interpretation allowed for a broader understanding of the potential insolvency context, encompassing the anticipation of future financial difficulties rather than immediate financial distress at the time of the transfer. With respect, all businesses, irrespective of size or activity, are risky. I would not have singled out a long-term family business selling cars to be any riskier than other businesses.

This remarkable stance shows a significant departure from the typical requirement that the transferor must be, or must be about to become, insolvent at the time of the transfer. It reflects a broader judicial approach to the interpretation of asset protection and insolvency under section 121(4), considering the long-term implications of engaging in high-risk business ventures.

But wasn’t Mr Wallace a bit naughty?

With respect all businesses are hazardous. The case is bad law in our view. But I can see the Court’s problem. Yes, Mr Wallace was a bit naughty:

• Mr Wallace was already committed to business debts at the time of the transfer – he should have started asset protection earlier
• Mr Wallace is exposed to potential personal liabilities before the transfer
• The guarantee to St George was signed close to the time of the transfer
• Sure the liabilities did not arise for another 10 years but there was a connection between the transfer and his  personal liabilities
• Mr Wallace continued to represent to his creditors (including St George), that he held an interest in the family home. (Have a look at what he said when he applied for debt.)

So, okay, maybe I am a bit harsh to suggest that the Wallace case is bad law. Instead, I believe the case will be limited to the facts. Since we will never have identical facts, it is likely the Wallace case will never be relied on by another court. Time will tell.

Conclusion: Legal Consolidated still argues that you should transfer early and often to your safe harbours.

After four years, are the assets I transferred to a safe harbour protected from bankruptcy?

No, this is not correct. There are different rules after 6 months, 2 1/2 years, 4 years and 5 years. Time is the great protector in asset protection. But, in some cases, the trustee in bankruptcy can claw back assets for infinity.

For example, there are no time limits if your main purpose in transferring an asset is to prevent the property from being attacked by the trustee in bankruptcy. See Wallace’s case above, as an example of this.

McMillan v Warner (Trustee) [2022] FCAFC 20

McMillan v Warner (Trustee) [2022] FCAFC 20 highlights the risk.

Dad transferred the family home to Mum a whopping 16 years before he commits an act of bankruptcy.

Dad had not lodged tax returns since 1955. This is when he was an articled clerk. The ATO caught up with him only in 1992! He promptly goes bankrupt.

The court in McMillan quotes the above Prentice v Cummins (2002) 124 FCR 67. It confirms:

• The Bankruptcy Act confirms that clawback occurs where a transferor’s main purpose in making the transfer can reasonably be inferred from all the circumstances was to defeat creditors if, at the time of the transfer, the transferor was (or was about to become) insolvent.
• If the transferor is not insolvent (or about to become insolvent) the subjective “main purpose” needs to be determined. While this concept is not defined in the legislation, it should be considered as meaning the “chief; principal; leading” or “dominant” purpose. (See also Pt IVA ITAA 1936). The question is assessed objectively, by reference to the objective facts and focuses on the ‘ruling, prevailing or most influential’ purpose (see FCT v Spotless Services Ltd (1996) 186 CLR 404).
• It is the trustee in bankruptcy who bears the onus of proving the main purpose of a transfer is to defeat creditors.
• The court infers that in all the circumstances, independently of the solvency of the transferor, a transferor’s main purpose was to defeat creditors.
• A transferor’s main purpose may be held to have been to defeat creditors, even if at the time of the transfer the transferor has no creditors or is able to satisfy all debts.
• If a person makes a voluntary settlement immediately before entering into a “financially hazardous venture”, this could establish an intention to defraud creditors, notwithstanding that there were no outstanding creditors at the time of the transfer (see, for example, Mackay v Douglas (1872) LR 14 Eq 106 and Ex parte Russell; In re Butterworth (1882) 19 Ch D 588).
• An inference that the main purpose of a bankrupt in making a transfer of property was to defeat creditors must be a reasonable and definite inference, not merely one of a number of conflicting inferences with equal degree of probability.

The Court looks at the rules in Prentice. And confirms that there is no ‘clawback:

• the husband had been advised by a supplier to his business that because there was an “absence of financial separation between your personal situation and that of the business” this is causing commercial difficulties;
• there was evidence that the creditor most affected by the transfer had not sought any security over the property, which supported an inference that the main purpose of the transfer was not to prevent it from becoming divisible among creditors or to hinder or delay the process of making that property available among creditors;
• the debt secured over the property at the time of the transfer was less than the value of the unsecured creditors outstanding;
• the wife continues to provide some level of financial support to the business immediately following the transfer (although this support did reduce over time);
• there is no conclusive evidence that the business operations are a hazardous or speculative business venture at the time of the transfer. Nor was there any doubt as to the husband’s solvency at the time of the transfer;
• the above points, combined with the significant lapse of time between the transfer and the bankruptcy meant that it was “inherently problematic” to conclude that the main purpose was to prevent the home from becoming divisible among creditors or was to hinder or delay the process of making that property available to creditors.

Family law – can your lover, mistress and spouse take your money?

How long have you been with your spouse or de facto partner? Once you have been together for 8 – 10 years you tend to lose half your assets to that person. And you tend to get half of their assets. This is if you break up. We believe that Binding Financial Agreements no longer work. But you make up your own mind.

The Courts now appear to allow bigamy in Australia. If you have a spouse and a lover then you get hit twice in the family court. See here.

(While a Divorce Protection Trust in your parent’s Wills stops your spouse from taking your parent’s money when you die, your wealth is at risk.)

My advice? Marry wisely. Don’t waste money on a mistress. If you want to waste money build a swimming pool or buy a boat.

Does a sole trader count as owning a small business?

Irrespective of the structure (Family Trust, Company, Unit Trust or Partnership) you are running a business if you are providing a product or service to the public. Otherwise, you are an employee. A sole proprietor runs a business.

I don’t earn much and the chances of being sued are low

Risk is risk. If you are running a business there is risk. Risk is not related to how much money you are making from your business. But you have to weigh up the cost of running your business out of structures like trusts. These factors suggest you need a company as trustee of a family trust or a company as trustee of a unit trust:

1. risk of being sued (do not kid yourself, every business suffers this risk)
2. assets in my own name
3. a lot of children over 18 or other family members to distribute Family Trust income to (point 3 is more about reducing tax, rather than asset protection)

In contrast, if you have little risk of being sued and, in any event, you have no assets in your name – then the value of an intervening business structure is less.

Does Joint tenancy override the trustee in bankruptcy?

QUESTION: Any advantage of having an asset owned as joint tenants? Rather than tenants in common? Does it prevent a trustee in bankruptcy from getting access to the asset?

ANSWER: Each joint tenant effectively owns an interest in the entire property. Does it make it very difficult for a trustee in bankruptcy to seize the property?

That is not correct. Under the Bankruptcy Act at bankruptcy, the joint tenancy is effectively severed. The trustee in bankruptcy unilaterally secures their ownership of their percentage of the property. (E.g. a half, one-third, on quarter, or whatever the case.)

Sure the remaining owner(s) talk with the trustee in bankruptcy about whether to sell etc… Or the remaining owner can seek to buy out the trustee in bankruptcy’s interest in the property for market value.

The trustee in bankruptcy may not accept the offer from the co-owner. He can seek to sell the property on the open market.

Even if the co-owner wanted to oppose such a sale, the trustee in bankruptcy can obtain court permission for a statutory sale.

Following the statutory sale, the co-owner and trustee in bankruptcy share the proceeds. This is according to your proportionate ownership interests.

The lesson? The person of straw should own no assets. The joint tenancy asset should have been transferred into a safe harbour years ago. Where it is a family home you are living in then your ‘person of substance’ spouse is the best person to own the home. This is so your spouse can get the tax CGT status of a family home.

If the asset is not a family home then there are other ‘safe harbours’. Such as a ‘cleanskin’ family trust.

If your spouse leaves you, then the Family Court divides the assets. The Family Court looks through Family Trusts and looks through who is the current owner of the assets.

Joint tenancy is also bad for Capital Gains Tax.

What happens to my family home at bankruptcy?

Under Section 58 Bankruptcy Act 1966 all ‘property’ vests in the Trustee-in-Bankruptcy. All your assets are transferred and are under the control of the Trustee-in-Bankruptcy.

Does the definition of ‘property’ include your family home? Yes, it does. And it includes your owned joint property with your non-bankrupt spouse.

The Trustee-in-Bankruptcy:

• Values your family home
• Checks the validity of any mortgages and caveats registered over the home
• Weighs up how much you contributed. And how much does your spouse contribute in buying and paying off any mortgages

If there is no equity in the home then the Trustee-in-Bankruptcy normally does not get involved. For example, your family home is worth $1m. But the (genuine) mortgage over the home is $1.1m.

What happens if the Trustee-in-Bankruptcy believes there is equity in your home? The Trustee-in-Bankruptcy sends a lovely letter to your non-bankrupt spouse. Your spouse is ‘invited’ to buy out your interest in the home.

If your spouse plays along and sends in the price your spouse is happy to pay for your interest in the home then the Trustee-in-Bankruptcy weighs up what an outright sale would bring in. This is if the home was sold in the open market.

The Trustee-in-Bankruptcy accepts or rejects your spouse’s offer.

If no agreement is reached then your spouse and the Trustee-in-Bankruptcy put the property on the market to sell. If your spouse does not agree then the Trustee-in-Bankruptcy goes to Court. And the Court grants a Partitioning Order. This forces your spouse to sell the property together with the Trustee-in-Bankruptcy.

The net sale proceeds are shared between your spouse and the Trustee-in-Bankruptcy. For example, if the property is owned 50/50 then the Trustee-in-Bankruptcy gets 50% of the net sale proceeds. The ‘net’ sale proceeds are after (genuine) mortgages are paid out and the costs of sale.

We have found that the Trustee-in-Bankruptcy prefers a ‘friendly’ relationship with the spouse. This normally works out best for both the spouse and the Trustee-in-Bankruptcy. Forced sales and Court fees eat up the equity for both the Trustee-in-Bankruptcy and the spouse.

The Trustee-in-Bankruptcy watches out for:

• Transfers of property made before bankruptcy. This is from you to another (related) person. This is especially if the purchase price is less than market value
• You giving your spouse money to pay off the home solely in your spouse’s name

Consider El-Debel v Micheletto (Trustee) [2021] FCAFC 117. In that case, the Court gave the home to the Trustee-in-Bankruptcy. This is because of the contributions by the bankrupt. There is a ‘resulting trust’ back to the bankruptcy. And therefore into the lap of the waiting Trustee-in-Bankruptcy.

Get divorced to stop the Trustee-in-Bankruptcy?

You are getting divorced. Your spouse wants your assets. The Trustee-in-Bankruptcy wants your assets. And so it begins.

The Trustee-in-Bankruptcy can even become a party to the Family Court proceedings!

In fact, the property settlement may be just between your spouse and the Trustee-in-Bankruptcy. All your assets are now under the control of the Trustee-in-Bankruptcy.

The Trustee-in-Bankruptcy usually reaches a side deal with your divorcing spouse as to the family home. The agreement is incorporated into the Family Court orders.

Gift and loan back arrangements do not work

This is an old tired strategy that has not worked since the 1980s. See Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530.

It is called the gift and loan-back arrangement. For another failed attempt see Atia v Nusbaum [2011] QSC044.

In Atia v Nusbaum the court looks at how the ‘sham’ works. A ‘sham‘ is where the documents ‘are not to create the legal rights and obligations which they give the appearance of creating’.

The court looks at ‘whether the act or document was never intended to be operative according to its tenor at all but rather was meant to cloak another and different transaction’.

Often to hide the sham there are a lot of complex documents. This also allows lawyers and accountants to charge a lot of money. The Court as it always does sees through the complex transactions. They are seen as trying to only do one thing. That is to place assets out of the reach of creditors. The sham merely seeks to move the assets away from the ‘at risk’ person. This is by owing a big debt to the family trust or another family member.

Common examples include:

1. The transactions are circular. They seem to have no commercial purpose.
2. There is a ‘round robin’ of cheques. This is ‘cheque kiting’. There are no actual physical transfer of funds. Often there is no money in any of the bank accounts to cover the cheques, anyway.
3. The ‘at risk’ person controls the loan repayment requirements. E.g. he may be the Appointor in the Family Trust.
4. The ‘ulterior purpose’ is obvious: protect the ‘at risk’ person’s wealth from creditors.

Speak to your own personal accountant and financial planner before you hand over good money for a ‘clever’ lawyer or accountant to take a lot of money from you to put in place this strategy.

Q: Transfer my assets into a ‘safe harbour’: such as a ‘cleanskin’ Family Trust or spouse?

It is a good idea to transfer assets out of your high-risk name or business into a safe harbour. I love it. However, when you transfer an asset there may be transfer duty (stamp duty) or Capital Gains Tax. For example, on real estate, you pay about 4.5% transfer duty. This is on the market or sale price: whichever is the higher. You also pay Capital Gains Tax. With shares, you pay CGT, if they have gone up in value.

In contrast to land and share, you can usually move cash from an unsafe spouse to a family trust or the ‘spouse of substance’ for no transfer duty or CGT.

Can I move business assets out of my name?

It is also a good idea to get risky assets, like a business out of your name and into another entity, such as:

• a company as trustee of a family trust – but only if it is just you and your spouse
• a company as trustee of a unit trust – good if you are co-owners of the business with someone other than your spouse – such as your children or friend
• partnership of family trusts – similar outcome to owning the business through a Unit Trust

You can move a business name for no stamp duty or CGT if the business name has no value. Get a note from your accountant to say that the business name has no value. Or you can register a new business name in the family trust: and start a new business from scratch.

Can I negatively gear in a family trust, unit trust or company?

Negative gearing is where you make an ‘income loss’ which is tax-deductible. This is with the hope that the asset goes up in capital value. In Australia, you generally only pay tax on this ‘capital gain’ when you sell or dispose of the asset.  If you own the asset in your own name or in a partnership you claim this ‘income loss’ straight into your income tax return. But they are not good for asset protection. They are not good for income splitting.

You are better to have a family trust, unit trust or a company structure. But, those structures trap the ‘income loss’. You cannot those losses out to the beneficiary or shareholder. The only way to ‘use up’ the ‘income loss’ is to have some ‘positively geared’ or other income in the same trust or company.

Am I an employee or a contractor?

As a mere employee, you are usually low risk. It is generally your employer that gets sued. You operate a brick-contracting business. All businesses are at high risk. You are therefore the person straw. You and your business structure (perhaps a company as trustee of a family trust) have none or few assets. Your spouse operates a hairdressing salon. But your spouse is smart, your spouse is just a mere employee. You (the person of straw) are the sole director of the company that operates the hairdressing saloon.

Even when employees are on a “frolic of their own” the boss is still liable. The opposite is true for ‘independent contractors’. This is the difference between an employee and a contractor. There is also ‘in-betweens’. For example, a person on 100% commission is generally still an employee. But you need to look at the contract between the parties. What if your employer makes you get an ABN? If you have an “ABN” (Australian Business Number) then you ‘own’ a business – with all the risk of running a business. If you have an ABN you are likely to be a contractor – not an employee.

Use my company as a trustee of many trusts?

A company is an expensive mouth to feed so you want to get your money’s worth. A company can wear many hats. It can trade in its own name and it can be a trustee of 100s of family trusts. But should you? Let’s say you have two family trusts: one runs the business (high risk) and the other owns shares (low risk). You could have the same trustee for both of those family trusts. I don’t mind. That is fine. But be aware of two problems:

1. mixing assets – often you make a mistake and use the company for the wrong purpose. E.g. you purchased shares for the safe family trust using money from the business family trust. Things get complex.
2. telling the story to the liquidator – if the business family trust fails you have to carefully explain to the time-poor liquidator that the company as trustee for the business is not related to the trustee company of the (safe) family trust (that just owns passive shares). Make sure your records are perfect.

Does a trustee always get an indemnity from trust assets?

If a trustee gets sued over the trust or the trust assets then the trustee can use trust assets to defend himself. This is called an ‘indemnity’. The trustee can indemnify himself out of the trust assets. However, there are limits on the trustee’s right of indemnity from the trust fund.

Was the trustee discharging his proper duties? If so then he is entitled to an indemnity for all liabilities incurred out of trust assets. The indemnity is enforceable under a charge or right of lien over trust assets. This means the trustee can physically take the assets and dispose of them to recoup the losses he, as the trustee, suffered. See Commissioner of Taxation v Bruton Holdings Pty Ltd (in liquidation) [2010] FCA 978.

However, the trustees first show that the expenses and liabilities were properly incurred in the business of the trust. Such activities include preserving and selling trust assets. But not always, consider Bare Trusts.

Using Bare Trusts for Asset Protection

Most trusts are Family Trusts and Unit Trusts. But there are also four common ‘Bare’ Trusts:

• Declaration of Trust BEFORE you buy – ‘secretly buy’
• Acknowledgement of Trust Deed – ‘AFTER the Trustee buys’

Where the trustee is acting as a bare trustee, his duties, powers and rights are limited solely to:

• protecting trust assets; and
• then conveying them on demand to the beneficiary.

Bruton Holdings Pty Ltd was running a court case. However, the court case was not related to the trust. Therefore, Bruton was not able to use trust assets to fund its non-related court case. The running of the court case is unrelated to merely protecting trust property. This was perhaps a little unfair. Consider the time the liabilities are incurred. The court proceedings took place only when Bruton was acting as a bare trustee.

Bruton Holdings Pty Ltd, the corporate trustee, only holds the trust property without any actual interest in it. The newly appointed trustee is about to take over the management of the trust. Thus the costs went beyond what the trustee was authorised to incur. Therefore, Bruton Holdings Pty Ltd was not reimbursed out of trust property.

In summary, it is dangerous to be a trustee. Put someone in as the trustee that you are prepared to lose. Expendable persons include a corporate trustee or your husband who beneficially holds no assets. We call him the ‘husband of straw’!

Q: We hold shares as bare trustee for our daughter. She is now 18. We want to transfer them to her. But I am worried if she suffers a failed relationship.

A: You are not correct. Your daughter is already the equitable owner of the shares. If she goes bankrupt or separates then the assets are lost anyway. The Bankruptcy Court and Family Court look to the equitable or true owners. They are not interested in the trustee. Therefore, it makes no difference if you transfer legal ownership to her or not.

What’s that you say? The Bankruptcy Court and Family Court will never find out. You tell no one. Sorry, but your daughter is obliged under oath to declare all her assets. She must declare those shares. If she lies under oath she does jail time.

Divorce Protection Trusts can override the Family Court. But that is only your assets that your daughter gets in your 3-Generation Testamentary Trust. As for her own assets, there is nothing you can do. Binding Financial Agreements no longer work. Sorry for the bad news. Marry a good person. And both work hard to keep the marriage operational.

Q: Why does Legal Consolidated argue that Limited Liability from a company has little value?

Q: I thought when you operate a business through a ‘proprietary limited company’ you cap your liability to just the assets beneficially owned by the company?

A: A ‘Pty Ltd’ is a private company. And yes the shareholder’s liability is capped to the amount paid for their shares. If the business fails the shareholders are not personally liable for the shortfall.

But it is the directors you need to worry about. You need at least one director. And you should only have one director. If you knowingly allow your company to trade while insolvent, the directors are personally liable.

If you guarantee your home for company debt then your home and your spouse lose their assets when the company goes down.

The ATO also has wider powers.