Australia is suffering from lawsuit madness with NSW in particular now considered the third most litigated state behind California and Texas. There are ways to protect your assets if you are concerned you may be sued and steps to take to reduce the likelihood of litigation.
Could you be a target?
- If you are the owner of a business, some professional indemnity insurance and other business-specific insurances won’t meet the claims if an accident occurs and it is deemed "criminal negligence".
- In the instance of a motor vehicle accident there are a number of scenarios, including lapsed registration, which could put your assets at risk.
- It sounds crazy but if a burglar hurts him or herself inside your home you could be liable unless you have public liability insurance in place. Check to see if it is included in your home and contents insurance policy.
Types of asset protection
Here we list the most common ways people protect their assets.
Insurance. Asset protection starts with adequate insurance cover.
Structure. Buying assets as an individual or in a partnership provides you with no protection whatsoever. Partnerships offer unlimited liability for the actions of the other partners. (Not a good thing!)
Ultimate asset protection. This is achieved through the use of discretionary trusts (including hybrid discretionary trusts) when you use a company as the trustee. Assets purchased through superannuation are also protected assets (but only to preservation age... and there are no new structures that you can put in place after that time).
Friendly debt. Friendly debt is another way to protect your assets. As equity in your home grows, one way to protect that equity is to use it as a deposit for other investments.
Internal debt. This type of debt does not require repayment to a third party. It is between you and an entity, such as a family trust, over which you have control. This involves borrowing the market value of your home from a bank, then using it as a “gift” to your family trust. The trust then lends the money back to you interest-free, securing the loan by way of a registered first mortgage over the family home. You can then use the borrowed funds to repay the bank loan.
To learn more about asset protection structures, start by consulting an accountant or financial advisor who specializes in this area. The ICAA is the Australian professional body for Chartered Accountants and can be contacted on 1300 137 322 Australia-wide or on their website www.icaa.org.au. Alternatively contact the Financial Planning Association of Australia or speak with your lawyer who may be able to recommend a suitable advisor to help you develop an appropriate strategy.
