Asset Protection: Part 1 – What are the Risks?
Asset protection is the process of organising one’s assets in a way to shields them from future liabilities and being taken away without permission. The mechanisms in which asset protection can be accomplished vary with each individual, their risk profile and their preferences and objectives.
This article will be the first in a two part series outlining the risks associated and the type of mechanisms that are available.
Broadly, asset protection can be achieved through the establishment of entities such as companies or trusts which interpose a layer (or layers) of separation between the individual and their assets.
To determine the level of asset protection required, one should examine their risk profile. Generally speaking, the sources of risk can be categorised into 2 categories:
- Risks related to the individual
- Occupation: In certain jobs (such as accountants, architects, lawyers, doctors) where services, advice or treatment to clients, there is more of a risk of getting sued by disgruntled clients compared to other occupations. Appropriate asset protection can limit the financial risk where insurance is inadequate or unable to cover it.
- Relationships: The financial toll when relationships disintegrate can be just as high as the emotional toll. Appropriate asset protection can limit exposure to claims from an ex and also ensure that your assets are correctly passed on to the people you wish to receive them upon your passing away.
- Offices you hold: If you are a company director or even on the committee of your local sporting club, you expose yourself to the risk of litigation, particularly in the event of financial problems with the company or club. The mere fact of being an office holder can lead to potential liability. The right asset protection can help limit exposure to such liability.
- Accidents: Accidents happen and asset protection becomes important where your insurance does not cover the accident or is not fully effective.
- Things you say or write: With the proliferation of email, discussion forums and internet blogs, the risk of defamation becomes greater.
- Risks related to your assets
- Direct real estate: If a tenant has an accident in your investment property, there can be a potential claim against you if it was caused by some defect in the repair or condition of the property.
- Business: Risks can arise out of obligations to financiers, employees, creditors (including the Taxman!) and customers and failure to meet those obligations can lead to claims against the business owner. Where an appropriate structure is used to own and operate the business, your other investment assets can be duly protected against these claims.
As outlined above, asset protection planning should be considered together as part of a structured analysis and evaluation process that fits with an individual’s risk profile, circumstances and wealth accumulation goals.
We will consider the types of structures and the considerations available in our next article.
This information has been prepared in good faith, is in the nature of general comment only, and neither purports, nor is intended, to be advice on any particular matter. You should not act or rely upon any matter or information contained in or implied without taking appropriate professional advice which relates specifically to your particular circumstances. The authors and consultants expressly disclaim all and any liability to any person (whether a reader or not) who acts or fails to act as a consequence of reliance upon the whole or any part of this information.
