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Any information contained in a blog on this website is general in nature only. The content of any blog posted below reflects information which is known to us as at the date of the posting of the blog. Please be aware that the law regularly changes. Please do not rely on the general information contained in the below blogs, instead we recommend that you contact us to obtain legal advice tailored to your own specific situation.

 

Jun24

Asset Protection Strategy example - Gift via Promissory Note and Loan-back

Amanda Quin - Monday, September 30, 2019

If you operate a business or hold assets then you may be exposed to loss arising from a variety of sources which could include:

  • bankruptcy or liquidation; 
  • a liability/damages claim;
  • a family provision claim on your death; or
  • a divorce (either your own divorce or in the case of family succession planning, the divorce of your children).

 

However there are a variety of strategies that may be able be used to potentially protect your assets or reduce the risk of your assets being accessible to a claimant.

Of course, there are varying degrees of protection that are able to be achieved and it is particularly difficult to protect your assets from loss through your own divorce, although a binding financial agreement (which can be entered into before cohabitation commences or before marriage or during cohabitation/marriage) may be able to assist. However it would require the co-operation of your spouse.

 

In other cases, such as family succession/divorce of children and protection from potential bankruptcy/liquidation there are a number of other strategies that can be implemented to protect your assets  - providing that you plan and implement your strategy at the appropriate time, in general, the earlier the strategy is implemented, the more beneficial it is likely to be.

One strategy which could be considered is a gift via a promissory note and loan-back. This involves the owner of the asset gifting the value of the equity in the asset (but not legal title in the asset itself) to a discretionary trust and simultaneously the same amount is loaned back from the trust to the property owner, secured by a mortgage in favour of the trust.

As a result, the asset is still legally owned by the same person, but its equity has been transferred to a trust and therefore may be better protected from a liquidator, providing that the transfer of  the equity and  the mortgage/loan-back is undertaken well prior to any relation-back (claw-back) period.

There are pros and cons of undertaking such a strategy, including issues that may arise with any current financiers,  and depending on your situation there may be more effective or simpler strategies available to you.

Accordingly, the strategy in this example should not be implemented without first seeking legal and accounting advice specific to your situation. If you would like to discuss this or any other potential asset protection strategy then please do not hesitate to contact Andrew Graham or Jeremy Tooth on 02 6882 3133.