Asset Protection – Asset Protection for Assets owned in your own name
Question
In the 2001 year, the client purchased three residential properties for approximately $650,000. The acquisitions were made in the client's personal name for negative gearing purposes. The properties now have a value of $1.35 million. The client is concerned about asset protection, particularly in view that he is a professional person exposed to negligence claims. Is there any way to protect the equity in the properties without triggering CGT or stamp duty?
Answer
In a perfect world, the client would transfer the properties to a trust or other similar protective environment. However, the imposition of stamp duty or CGT on the transfer would be a substantial financial liability for the client. One alternative is to utilise our Secured Debt Process to protect the equity the client has built up. Under this process, the client makes a gift by cheque or bearer promissory note equal to the equity in the properties to a discretionary trust, preferably a Bloodline Trust. The trust then converts the amount of the gift into a secured liability owing by the client to the trust. The client's accountant should provide a certificate of solvency at the time of the gift, and the process should be reviewed every three years to account for any further growth in equity. The process is effective to protect the equity in the asset, but is subject to the clawback provisions of the Bankruptcy Act (in most cases they cease to apply 4 years after the gift is made).
Asset Protection – Protecting the Family Home
Question
Clients acquired the family home in their personal names to ensure they were entitled to the CGT exemption. As they have significant equity in the property, they are concerned about protecting the value in the family home in the current environment. Are there any options?
Answer
For asset protection purposes, the clients ought to transfer the family home to a trust environment. However, the imposition of stamp duty on the transfer would be a significant financial liability. Unless specifically addressed, the clients would also lose access to the Main Residence CGT exemption. An alternative is to utilise the Secured Debt Process to protect the equity in the family home. Under this process, the clients make a gift by cash, cheque or otherwise equal to the equity in the family home to a discretionary trust, preferably a Bloodline™ Trust. The trustee, in lending that amount back to the clients and taking security by way of mortgage, is elevated to the position of a secured creditor of the clients. A certificate of solvency at the time of the gift is made ought to accompany the documentation and the process should be reviewed every three years to account for any further growth in equity. The process is effective to protect the equity in the family home, but is subject to the clawback provisions of the Bankruptcy Act (in most cases they cease to apply 4 years after the gift is made).
