What is Asset Protection?
Published 7:08 am 15 Jul 2021
We all want to build a collection of assets to increase our wealth, but it’s just as important to learn how to protect your assets.
Table of contents
- What is asset protection
- How does asset protection protect you
- Protecting your assets from creditors
- What can you protect with asset protection
- What is an example of asset protection
- How to set up an asset protection trust
- Is asset protection insurance worth it
- How can I protect my assets from a civil lawsuit
Over the 2019-20 financial year, there were 20,762 new personal insolvencies and 12,450 bankruptcies in Australia. Without sufficient asset protection, these individuals and companies stand to lose everything they’ve worked so hard for.
That’s why it’s important to learn the best way to protect your assets, to ensure that in times of economic uncertainty or a downturn in your business, you are not vulnerable to losing everything.
But what does asset protection mean?
Read on, as we’re going to teach you all about asset protection in this article.
What is asset protection?
Asset protection refers to legal strategies that are used to protect one’s assets from being seized or otherwise lost through unforeseen future events.
Asset protection helps to safeguard assets in times of financial and personal distress and is employed by many wealthy individuals in society to ensure they mitigate the risks of their financial activities.
How does asset protection protect you?
Depending on which method of asset protection you pursue, you can achieve varying degrees of protection over your assets. Whether that be through setting up a limited liability business structure or getting asset protection insurance. Ultimately, the kind of asset protection that you’ll need will depend on your circumstances.
However, one of the most effective ways to protect your assets is by simply not having any. As Rockefeller famously said, “The secret to wealth is to own nothing but control everything”.
This doesn’t mean that you simply shouldn’t have any assets, but rather, your assets should be acquired by, or transferred to a third party (i.e. a trustee) so they aren’t attached to your name.
The reason for this is that when you encounter legal or financial strife, either as the result of a lawsuit or bankruptcy, creditors will seek to recoup the money they are owed by seizing assets that are under your name. If your assets aren’t under your name, it becomes more difficult for creditors to find and seize them.
Doing this can have both tax and asset-protection implications, however, you must seek legal counsel if you wish to go down this route.
Protecting your assets from creditors
If there are creditors that are attempting to seize your wealth or assets as a result of a lawsuit or bankruptcy, the best method of protecting those assets is to use a trust.
Trusts are beneficial for asset protection as they transfer ownership of assets to a trustee, who then disperses the assets to beneficiaries.
Again, a trust has the benefit of separating assets from the individual so that creditors will have difficulty seizing those assets, should that individual encounter legal strife.
However, this commonly touted means of asset protection will not make your wealth bulletproof and your assets may still be exposed to attack or loss pursuant to insolvency legislation. This is because the law looks beyond ownership of assets – that is, who is registered on a title as owner and rather, focuses on beneficial interest in an asset – that is, who really benefits from the asset. So for example, in bankruptcy, a house may be registered in one spouse’s name but a trustee in bankruptcy can still take half the value of that house if the spouse who lives in the home benefits from it, albeit not registered as the owner. Similarly, if you own assets in a trust but are the beneficiary of that trust, those assets are still vulnerable if creditors are pursuing you.
There are several types of trusts that can be used to protect assets in Australia, including discretionary trusts, family trusts, testamentary trusts, charitable trusts, and what is known as a ‘Vestey Trust.’
The most effective form of protection for all asset types is a combination of a Vestey trust and a Testamentary trust. The Vestey trust serves to guard your assets in your lifetime whilst a testamentary trust preserves your wealth or your legacy for the benefit of your bloodline after you die.
What can you protect with asset protection?
If you’re asking yourself “do I need asset protection?” then look below to see if you have any of the listed assets that can be protected:
- Business assets
- Company assets
- Family assets
- Liquid assets
- Assets in marriage
- Personal assets
- Real estate assets
- Digital assets
For each of these types of assets, a combination of a Vestey trust and a Testamentary Trust can help you to safeguard the assets you’ve worked so hard to accumulate – which is just as important as gaining assets in the first place.
What is an example of asset protection?
To better understand the benefit of utilising a trust to protect your assets, let’s look at a simple example.
For many, passing wealth onto their children is an important goal in order to set them up for the future. However, wealth can very easily be lost along the way; whether that be through taxes, bankruptcy, future lawsuits or even divorces.
As such, you may wish to establish a Vestey Trust to control and preserve that wealth during your lifetime and a Testamentary trust which has your children as the beneficiaries, to ensure they inherit and keep the assets you’ve intended for them; rain, hail or shine.
How to set up an asset protection trust
As we mentioned, the combination of a Vestey Trust and a Testamentary trust is one of the best methods to protect your assets.
However, it’s important to note that setting up a trust is only truly effective as a preventative measure, meaning that you should consider establishing a trust while times are good rather than during a lawsuit or financial distress. If the primary purpose of setting up your trust is to evade creditors then a court may later set that aside.
In order to set up a Vestey Trust you need to follow the following steps:
- Find a settlor (usually a lawyer or accountant) to set up the trust.
- Select a trustee to oversee the trust. The trustee will manage the trust’s assets for the beneficiaries of the trust.
- Write up a trust deed that outlines the details of how your trust will operate and what the objectives of the trust are.
- Given that a trust is a legal document, ensure that you seek legal counsel throughout the process to ensure you have done everything in accordance with the law.
Is asset protection insurance worth it?
You can insure assets such as vehicles or property against unforeseen circumstances to mitigate any financial losses.
For example, you might insure your vehicle against damages, so that if you get into a car accident, and your vehicle is deemed a write-off by your insurer, your insurer will reimburse you for the market value of that vehicle or perhaps provide you with a replacement vehicle.
Likewise, you might insure your property against adverse weather events like flooding or lightning, or even against cases of theft, and your insurer will cover the costs of the goods that were stolen or damaged.
Asset protection insurance is certainly beneficial in the above circumstances and can shelter you from sudden and unexpected financial losses.
However, asset protection insurance will not protect your assets from creditors or in the event of a lawsuit or bankruptcy.
As such, it may be useful to utilise trust structuring for shielding your assets while also getting insurance for them to provide maximum protection.
How can I protect my assets from a civil lawsuit?
A civil lawsuit is a dispute between two or more legal entities, such as individuals or companies. A civil lawsuit may typically arise due to a broken agreement or promise, or a claim for negligence where a breached contract or a breach of a duty of care has caused a party loss or damage requiring compensation or payment of money.
In the event that you are facing a civil lawsuit and thus risking bankruptcy or asset seizure, a Vestey Trust will help you to maintain control of your assets and wealth and give you options you would not otherwise have had.
However, it’s important to note that all trusts aren’t created equal and some are not guaranteed forms of asset protection. For example, as DG Institute CEO Dominique Grubisa stated:
…The law is like a hot knife through butter [creditors] don’t look at who’s registered as owner, that’s just seen as an alias for you. They look at who benefits. They look at the beneficial interest or the beneficiary of the trust.
Put simply, there are asset protection strategies that you’ll want to avoid, which was a difficult lesson Dominique discovered after going through severe financial hardship and losing millions of dollars. It was this process that led her to discover the Vestey trust, a legal strategy that adds another layer of asset protection over standard trusts.
Choosing the right trust for you
As mentioned above, there are several different types of trusts, and each can come with benefits and costs that may or may not appeal to your circumstances. It’s important to inform yourself of the nuances of each trust to ensure your assets are protected in the best way possible.
However, here at DG Institute, we believe that Vestey trusts, coupled with Testamentary Trusts, can offer individuals an increased layer of protection against asset seizure and loss in times of financial or personal distress.
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