Building your wealth defences

November 2013

This article was first written for wealth management firm Harper Bernays.

It was in medieval times that castle builders worked out that round towers provided better protection than square ones. 

One of the ways to overthrow a castle's defenses was to burrow under a castle keep, fill the tunnel with any number of flammables and cause a structural collapse at the corner of the structure. Though no castle was completely impenetrable, medieval engineers soon worked out that adding a moat and a barbican could at least buy some time from an invading army, giving them time to fortify from within. 
It may not seem obvious to compare modern day wealth and medieval castles, but if you think about it there are a few parallels: both take time to build, are extremely valuable and potentially vulnerable if you haven't protected it properly.  

Shoring up your wealth defences
Modern day wealth builders need to understand that as with any structure, it's important to look at ways of shoring up the defences. No mechanisms will make your assets 100% secure, however if you're someone who is adventurous with risk, business or other entrepreneurial pursuits, it makes sense to build – at the very least – a structurally sound round tower. 

It is something of a given that wealthy people with interests in certain industries or professions face bigger risks for litigation or bankruptcy and for that reason should consider an asset protection strategy as they build wealth, not as an 11th hour rescue if the creditors are already in pursuit. 

In a post-GFC world, where business confidence has struggled and the media feeds us a steady diet of uncertainty, we have seen a significant number of businesses failures – and subsequently wealthy individuals – that could have been less painful had better wealth protection been in place. 

Look for your wealth weaknesses
Not many of us want to talk about it, but if you've spent a large chunk of your adult life accumulating and building wealth, it makes sense to look for the weaknesses in your investment structure, the assets you hold and look at tax-effective ways to protect it. 

Two of the more common ways to protect your assets is through straight transfer to a no-risk spouse or family member or 'gift-and-loan-back' transfers under a trust arrangement. Let's consider your family home for a moment, though most wealth assets can be protected these ways. 

A straight transfer works the way the name implies: the whole property or a substantial part of it (i.e. 99%) is transferred to a third party, which may be a spouse, close family member or a discretionary trust who is at less risk of bankruptcy or litigation. In this instance, stamp duty is payable on a sliding scale depending on which Australian state the property is in and will be as much as 6% of the transfer value. No capital gains are paid because of the principal residence provision and CGT won't apply if the property is sold, provided it remains a principal residence. 

In the event of bankruptcy, if the asset was transferred as a gift then a creditors would have access to the property. They would have access to the whole asset and would benefit from any increase in its value since the transfer. 

A gift-and-loan-back transfer is an alternative to the straight transfer which, broadly speaking, achieves equivalent protection for the property compared with a straight transfer however potentially reduce the costs associated with the transfer. 

Let's say you have equity in your home of about $1 million. Using a family trust, you can gift this equity to the trust, which in turn will lend you the same amount of money and take a security over the properly. 

There's no change in legal ownership, however in the event that the creditors come calling, the loan arrangement with the trust puts it first in line as a creditor. Any growth in equity is still vulnerable to creditor process, however the actual property equity is largely secure. You can also get the benefit of not having transfer duty or capital gains and generally the only transaction cost is the registration fee for the mortgage the trust holds. 

The primary benefit of choosing the 'gift and loan back' approach to asset transfer is two fold: first if a direct transfer of an asset is not desirable or appropriate and second where the tax and stamp duty costs are prohibitive. That said, it should always be discussed with your accountant or tax advisor to ensure that it is an appropriate way to protect your assets. 

A round tower isn't enough
In either case, sometimes it's not enough to build a round tower. Sometimes you also have to build a moat, a drawbridge, a portcullis, a safe spot for your archers and possibly some machicolations.  While these might not protect you completely from the mortar shells, at the very least, an asset protection strategy is likely to leave you with enough to regroup and keep your creditors at bay. 

Asset protection is unique to you. Please contact us on 02 9957 4033 or email us to book a confidential discussion about how to make sure your wealth is properly protected. 

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Last updated November 2013. This article is provided for information purposes only and should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.


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This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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