Protecting your lifestyle from bankruptcy should be a priority for every business owner. This article sets out a series of tips to help you achieve this goal.
From the start …
- If you’re a partner in a partnership, seek an indemnity from your other partners in relation to partnership liabilities (this generally only applies to non-equity partners).
- If you are a company director, ensure you are covered by a directors and officers (D&O) insurance policy and have signed an indemnity deed (also known as an Officer Protection Deed) with the relevant companies.
- Take out and maintain a professional indemnity insurance policy while you are in the business and for a period of seven years after leaving the business. If your business has a policy carefully review it, in particular any special conditions and exclusions.
- Do not give any personal guarantees, particularly if you are a company director.
- Buy your family home in your spouse’s name, minimise your contribution to the purchase and ensure that any home loan is in the name of your spouse so they, not you, are liable to repay the loan.
- Contribute to superannuation.
- Setup a discretionary trust.
- Buy assets in a company, the shares in which are owned by another company that is the trustee of a discretionary trust. Alternatively, buy assets in your spouse’s name, not your name.
- Spend as much of your income as possible on lifestyle expenses so any mortgage payments or savings can be attributed to your spouse’s income. If there is money leftover, give it to your spouse.
- Loans made by you (e.g. to your spouse, a trust or company) and unpaid trust distributions (i.e. amounts that a trustee of a trust resolves to distribute to you but which are retained within the trust) are assets and are exposed to creditors’ claims. Keep them to a minimum.
- Don’t inherit anything! Ask your parents to make a testamentary trust will so that your spouse and children, not you, receive the inheritance.
If you have assets and think it’s too late …
- Take steps to protect your assets when you have no creditors.
- If you have assets then transfer them as early as possible so that time starts to run in your favour. Suffer the consequences, if any, later.
- If you transfer assets to your spouse (or another entity or third party) document the reasons for the transfer (e.g. estate planning or tax planning).
- If you transfer assets and receive consideration for the transfer, verify the value of the assets transferred (e.g. by obtaining a valuation) in order to establish fair market value.
- Document any consideration that you receive for any assets transferred.
Superannuation – For everyone …
- Make sure you are a member of a regulated superannuation fund.
- Establish a pattern of superannuation contributions by making both concessional and non-concessional contributions, in particular at any time after receiving a substantial sum of money (e.g. inheritance).
- Maximise concessional contributions in order to minimise assets exposed to creditors’ claims and maximise your tax benefits.
Superannuation – If you have a SMSF …
- Your SMSF should have a corporate trustee, not individual trustees. As the SMSF’s assets are owned by the trustee, not the individual members, if an individual member is bankrupted the SMSF’s assets would not need to be transferred to a new trustee and there would be no dispute as to the capacity in which the assets are owned.
In order to comply with superannuation legislation you must be a director of the corporate trustee, but you do not have to own shares in the corporate trustee. Any shares in the corporate trustee could be owned by your spouse or the trustee of a discretionary trust.
If you have a discretionary trust …
The following structure should minimise the risk that assets held in a discretionary trust will be exposed to claims by creditors:
- The trust should have a corporate trustee, which only acts as trustee of the trust and not in any other capacity.
- You should either not be a director of the corporate trustee or should be one out of two or more directors. For example, the directors could be you and your spouse (or another relative) and/or a professional adviser (e.g. your accountant or lawyer).
- You should either not own shares in the corporate trustee or if you do then it should only be a small percentage/interest (e.g. less than 10%).
- You should either not be an appointor of the trust or if you are then you should be one out of two or more appointors who must make decisions unanimously. For example, the appointors could be you and your spouse (or another relative) and/or a professional adviser (e.g. your accountant or lawyer).
- You should not be a default income or default capital beneficiary of the trust.
- You should be one of a number of beneficiaries of an unrestricted class and should not receive distributions from the trust that demonstrate a pattern of distributions or entitlement to an ascertainable proportion of income.
You should seek legal advice from an experienced solicitor or accountant with the relevant expertise in order to minimise your assets that are exposed to creditors’ claims.