What asset protection is available for real estate investors?
Investing in real estate can pose risks that might result in legal proceedings. Asset protection for real estate investors can be achieved by implementing the following protections:
- Insurance: Having an insurance policy in place on a property can help protect it against risks and is a popular asset protection method used by real estate owners. Insurance policies can cover a wide range of issues, so it is always advisable to have a legal professional review your policy documents to gain knowledge of both the inclusions and limitations under the policy. This can help minimise any potential disputes with the insurer in the case of a claim. While insurance can mitigate some of the financial damages assets are exposed to, due to the complexity of some insurance claims, coverage should not be seen as the sole path to asset protection.
- Compartmentalisation of Assets: This is the process of separating assets from risks and liabilities. One of the ways of doing so is establishing a limited liability company for each asset. These provide boundaries between assets and prevent lawsuits against one entity affecting other accumulated assets.
- Use of Shell companies: A shell company is used as the face of the business and even though the company owns nothing, legally it is shown to operate everything. Employment of this method separates personal assets from business assets. Additionally, it helps protect personal finances if the business must declare bankruptcy or defaults on a loan.
- Anonymity: Having an anonymous trust makes it incredibly difficult for lawyers to connect the trusts to any Limited Liability Company and hence protects the asset when a law suit is instituted against the business.
How do Businesses protect their assets?
The most important aspect of asset protection for businesses is the separation of personal assets from liabilities of businesses. The same can be achieved by doing one of the following:
- Selecting the right structure for the business;
- Establishment of Trusts;
- Maintaining corporate veil;
- Purchase of Comprehensive Insurance;
- Making Superannuation Contributions;
- Own assets in the name of family members and minimising contribution towards such purchase;
- Protection of Intellectual Property; or
- Having proper contracts in place.
How do Trusts help in asset protection?
Establishing a Trust helps protect your assets and can be comprised of either individuals or corporate trustees to oversee the management of the assets. The trustees operate and control the trust in accordance with the trust deed (agreed to by trustees) and the profits of the assets or business are distributed amongst the beneficiaries by the trustees.
The trustee of an individual trust will be personally liable for all debt in the name of the trust but in the of a corporate trustee, the shareholders of the company receive protection through the company’s limited liability. Whilst corporate trustees provide additional protection, it requires the business owners to incorporate another company and thereby increases setup and maintenance costs of the business.
Establishment of a discretionary trust by the founders of a business provides an additional cushions to the shareholders wherein the individual shareholders can protect their share in the business from creditors in circumstances where another beneficiary is sued, made bankrupt or insolvent.
What is the relationship between business structures and asset protection?
Correct structure of a business gives the benefit of asset protection so it is always advisable to keep this in mind at the outset of starting your business as changing the structure later can be a lengthy and tedious process. A common business structure might be a Company functioning along with a discretionary family trust and a unit trust. The company name is used to trade while the assets are divided between and operated by the trusts thereby providing protection to assets. The following must be considered before deciding the structure of a company:
- Simplicity, cost of implementation and cost of ongoing administration
- Governance and management
- Asset protection
- Succession planning
How to protect your personal home under Asset Protection?
Family homes are generally owned by individuals on their own which can put them at significant risk. Although establishing a trust structure gives a business the protection of a corporate veil, creditors can access personal assets of directors or trustees if the structure of the business has a deficit of assets to pay its debts.
Spouses or partners holding majority ownership share of the home is one of the most common protections. However, such person should not be at a risk of bankruptcy or litigation, as they become personally liable for any debts.
Establishing a trust to hold the home or managing assets through a superannuation are considered good option for protection of personal homes against creditors. However, the tax implications of each such protection must be considered by the business owners.
In summary, asset protection needs to be customised for your specific requirements. Seeking quality legal advice is essential to ensure the current asset protection framework is created for your assets.