The Bad Asset Protection Strategies You Need to Avoid (To Ensure You Don’t Lose Everything if You’re Declared Bankrupt)
Published 4:58 am 25 Oct 2019
The mark of smart property investors is that they protect their assets. Avoid these strategies if you want to make sure you don’t lose yours.
Whether you’re investing or running a business, you face a certain amount of risk. There’s always the possibility that something could go wrong.
A cash flow issue could lead to negative tax implications. A drop in business activities could result in struggling to pay your bills.
In the worst-case scenario, you’ll have to declare bankruptcy. The last thing you want in this situation is to lose your personal assets, such as your investment properties.
So how do you protect your assets?
You avoid these so-called asset protection strategies.
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Strategy #1 – Placing Assets in a Trust
This is a complicated one, as there’s a lot of misinformation about trusts. They’re ideal in terms of streamlining your cash flow. Plus, a trust is one of the most tax effective structures for property investors.
However, they do not offer as much protection as you may think.
If you’re named as a beneficiary of the trust, your creditors can still come after you if you run into financial issues.
The good news is that this doesn’t apply to all trusts. DG Institute can help you to leverage a Vestey Trust as part of your asset protection plan.
The danger lies in assuming you’re protecting assets by the mere act of placing them in a trust.
Strategy #2 – Just Placing Assets in a Superannuation Fund
According to Money Magazine:
“Provisions in the Bankruptcy Act protect certain assets and not others. Protected assets typically include superannuation…”
This may lead you to believe that all assets held in a superannuation fund are safe from creditors.
However, that may not be the case. If the creditor can prove you’ve transferred assets with the sole intention of protecting them, they may be able to void the transfer.
The same may go for selling a property and then transferring the money into superannuation.
Strategy #3 – Diluting the Creditor Pool
Some indebted people go so far as to create creditors out of thin air in an effort to dilute the creditor pool.
Worrells, a legal firm specialising in insolvency cases, explains why they do this:
“<It’s with the> purpose of influencing the voting on resolutions by creditors or to participate in dividends and recover assets that would otherwise be available to real creditors.”
However, a keen-eyed bankruptcy trustee will be able to see what you’re attempting to do with this strategy. This could lead to them voiding the related creditors’ votes, leaving third-party creditors with control.
This strategy only has a chance of working if there are no discrepancies to spot. Rushing to create related creditors usually creates a paper trail that can lead to the strategy falling apart.
Strategy #4 – Undervaluing Assets and Selling Them
This strategy involves selling an asset before a creditor can try to claim it back as part of debt repayment.
However, you’re not selling with the intention of getting as much cash as possible. Instead, you undervalue the asset and then sell it to a related party or company.
The idea is that the related party will retain the asset at the lower value, leaving the bankruptcy trustee with no recourse.
But as with many of these strategies, the transaction leaves a paper trail. Because you’re trying to undervalue, you may not have valuations carried out by legitimate third parties. Bankruptcy trustees and liquidators can show this and reverse the transaction. Thus, the asset gets placed at risk again.
Strategy #5 – Not Having a Strategy
This is the most common bad asset protection strategy.
Let’s say you’re investing in a property. You decide to buy it in your own name because it makes the transaction simpler. That means you have no strategy in place to protect your assets.
If you get declared bankrupt, all of the assets in your name are now at risk.
So many investors just don’t think about having a Plan B if something goes wrong. So they make decisions with no strategy behind them.
Why You Want to Protect Yourself from Losing all Assets
DG Institute’s founder, Dominique Grubisa, knows just how important asset protection is. A lawyer by trade, she spent most of her adult life building wealth through property investment.
And in the blink of an eye, she lost it all. Over 20 years of hard work disappeared because she didn’t have a suitable asset-protection strategy.
At her lowest point, she and her husband even lost their family home. They ended up homeless with three children, all under the age of four.
The irony is that she specialised in property in her legal career. But even with her knowledge at the time, she fell for the bad strategies others put forth.
Her experience taught her that trusts aren’t necessarily suitable for asset protection. Without the right structure, a trust can leave your assets vulnerable in cases of bankruptcy.
Dominique took what she learned from her experiences and used it to found DG Institute. Her goal is to ensure that what happened to her doesn’t happen to other people. She hopes to use what she’s learned to help others deal with the legal issues surrounding bankruptcy and debt.
Create the Right Asset Protection Structure
It all comes down to structure.
If you don’t structure your investments correctly, you leave them at risk. The dangerous thing is that the “common” knowledge about asset protection solutions is often incorrect. That’s clear when it comes to the issues you may experience with a trust or superannuation fund.
Having somebody to help you create a proper structure now could save you tens of thousands of dollars in the future.
And that’s exactly what Dominique and the team at DG Institute want to help you with.
The Master Wealth Control service will help you to understand the ins and outs of asset protection. It also shows you the good strategies, such as using a Vestey Trust, that offer an extra layer of protection to your assets.
Lawyer, Asset Protection Specialist and Property Educator
Dominique Grubisa is a practising legal practitioner with over 22 years of legal and commercial experience. She is a property investor and developer, an entrepreneur with businesses in Australia and Southeast Asia, a speaker, educator, writer and published author. You may contact Dominique at email@example.com
This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.