Asset Protection

What Is Asset Protection?

 

To many people asset protection means being able to control assets or have access to assets which the person does not legally own. If the person is successfully sued these assets will not be available to be used to recompense the successful plaintiff. Common examples include assets being owned by a family company or trust, or being placed in the spouse’s name. But this is only one aspect of asset protection. Asset protection is about minimising the exposure to risk. The risk, of course, is the risk of losing assets. In order to lose assets a taxpayer must first be successfully sued. So the first step in asset protection is to minimise the risk of being sued. For a professional, such as an accountant, this means minimising the risk of a professional negligence suit by keeping up to date by way of continuing professional education, reading etc, taking extreme care when providing advice and seeking help from experts when needed. In the case of a manufacturer this includes having systems in place to minimise the chance of a faulty product from being produced, completing orders and complying with contracts on time and having a safe working environment to minimise injuring employees. As it is frequently said, prevention is often better than a cure.

Another aspect of asset protection is minimising the risk of loss of assets in the event a client’s suit is successful. One such method is to have adequate insurance cover. Another is to ensure that the assets are out of reach of the successful plaintiff. This involves the taxpayer divesting themselves of their assets or, even better, the taxpayer never owning the assets. Alternatively, a taxpayer may own an asset but a successful plaintiff may be unable to access the asset because some other person has a prior right to it. For example, the asset is secured in favour of a third party so that even if it were sold the sale proceeds would first be used to pay the third party and not the successful plaintiff. That third party may be an associate of the taxpayer.

As can be seen, there can be many ways in which taxpayers can minimise their exposure to risk, all of which are a form of asset protection. The best asset protection is achieved by having a number of layers of protection. For example:

  • First layer – ensure risk of liability is minimised by keeping up to date, seeking expert advice when required, taking care when providing advice etc.
  • Second layer – have adequate insurance cover.
  • Third layer – own little or no assets

Also, asset protection does not simply involve considering what will occur if a taxpayer is successfully sued. It must encompass protecting all of the taxpayer’s assets including business assets, personal assets and superannuation money. It should also encompass circumstances such as death and divorce. There is no point placing all assets in the spouse’s name if the spouse dies and under the terms of the spouse’s will, all the assets are left to the taxpayer and are now available to the taxpayer’s trustee in bankruptcy.

No matter how careful or how well a professional may run their practice, and even though they may never provide negligent advice, they can still be exposed to the acts of others such as a partner or an employee.

Each partner is jointly liable for the debts of the partnership so that if a taxpayer is a partner in an accounting partnership and one of the taxpayer’s partners acts negligently, the taxpayer will be jointly liable for any damages awarded against the partnership. Thus the personal assets of a taxpayer are exposed to the negligent acts of the taxpayer’s partners.

Similarly, if an employee provides negligent advice in the course of their employment, the employer may be sued. So if the employer is a sole practitioner, personal assets of that sole practitioner are at risk. If the employer is a partnership of which the taxpayer is a partner, then each partner’s personal assets are at risk.

Generally, if a partner retires from a partnership that partner will still be jointly liable for the debts of the partnership accrued prior to their retirement. If a partner dies, that partner’s estate will generally be severally liable for the debts of the partnership at the time of death. (Note: this is a general position only and as each state has its own rules for partnerships, the relevant partnership act should be consulted.)

The vulnerability of a taxpayer to a partner’s misdeeds is illustrated by the 1990 case of Walker v European Electronics Pty Ltd (In LIQ) (1990) 23 NSWLR 1. In Walker a partner of an accounting practice was personally appointed receiver of a company. The partner misappropriated funds of the company in receivership. Although the receivership was a personal appointment, not a partnership appointment, the innocent partners were liable to compensate the company and its directors and shareholders for the loss suffered as the fraud was undertaken in the course of partnership business.

 

Disclaimer : Information contained in this article represent general comments only and this is not advice. Tax is only one of the factors that should be taken into account when making a financial decision. You should discuss your tax affairs with a tax professional before entering into any financial transaction with tax implications.