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How a family protection trust safeguards assets

ChangeGPS // Asset Protection, Estate Planning, Practice Management

A key reason clients visit accountants is to learn about asset protection strategies – especially if they’re vulnerable to potential litigation. But while a common strategy is to put assets in the name of a non-working spouse, a recent court case has exposed how this approach is now less than ideal.

Putting an asset in the name of a spouse is a common strategy designed to protect it from creditors and bankruptcy trustees. But a recent case: Commissioner of Taxation v Bosanac, shows that placing assets, such as the family home, in a spouse's name doesn't necessarily protect you from creditors.


Up-to-date advice that helps protect your clients' assets

The case involved a married couple – Mr and Mrs Bosanac – who bought a $4.5 million family home. They later separated and after this, Mr Bosanac was pursued by the ATO for significant tax bills. The ATO argued that 50% of the home was Mr. Bosanac's and wanted to put a caveat over it. Mrs Bosanac, however, argued that the house was fully hers. The case eventually went to the Federal Court where it ruled in the ATO's favour and determined that Mr Bosanac did hold a beneficial interest. A caveat was put on it to satisfy his debts.

The case is interesting because the wife was the sole registered proprietor of the home, but the ATO argued a "presumption of resulting trust" where her husband had a 50% beneficial interest. While Mrs Bosanac argued that the presumption of advancement existed, there was no documentation to support this. This decision has significant implications for businesspeople who have structured their affairs for asset protection.



Our tax-planning strategies benefit both 'asset' and 'risk' spouses

The ruling on Bosanac highlights how putting everything in a non-working spouse's name can be dangerous. If a spouse wants to be known as the owner of an asset – and if they're going to borrow to purchase it – there are three things they need to do to protect it:

  • they should pay any deposit from their personal funds, not from joint funds.
  • they need to pay the loan and other property expenses themselves, from their personal account, not a joint one.
  • they must earn sufficient after-tax income to meet all these payments – that is, they must not rely on income from the spouse who is at risk.

If they're an "asset spouse", they can still receive a wage and employment income, but they need to earn enough in after-tax income to meet the payments of the asset. The loan also needs to be only in the asset spouse's name.


How we help keep your clients' wealth in the family

While your clients will likely be familiar with the benefits of a family trust, another type that can help with asset protection is a family protection trust. This type has bloodline provisions, so assets remain within the family.

It's a simple process to transfer assets into a family protection trust. Say, a couple own a property in both their names, and they want to gift the net equity in the property to a family protection trust. What they can do is gift the equity via a gift deed. What they are not doing with this process is transferring the property into the trust, and because of this, there is no stamp duty or capital gains tax payable.

Later down the track, if the property is sold, all that needs to happen is for the family protection trust and the bank to release the mortgage.

However, before anyone can gift any asset or money to a family protection trust, they need to be solvent. If your clients wish to do this, you'll need to sign off on a solvency certificate. If your clients owe money, this is not a strategy they can use to get out of paying their debts; they need to be solvent.

Now, let's say that you do this for your client, and in 12 months' time, someone says the asset they gifted into the trust is going to be clawed back. This can't happen because no one can say the money was gifted into the trust to avoid paying a debt because they were solvent when they gifted it. Clawback provisions are used when someone has taken action to avoid paying a debt; they can't be used when someone was solvent at the time of taking that action.

We provide all the technology you need to stay compliant

Another example where asset protection was potentially an issue concerns a recent case of a well-off couple with three children. The couple owned four racing cars and wanted to leave them to two of their children while leaving the other child – a "recalcitrant sister" – out of the will.

One of the children said the cars had actually been transferred to him but in reality, all that had happened was that the licence registration had been transferred – the cars hadn't been gifted to him. The problem here is the recalcitrant sister could say that the cars should form part of the estate. What was needed was a deed of ratification, to show that the cars were intended as a gift to the son at a certain point in time.

It is possible to ratify a decision previously made if the correct processes are followed. What you cannot do is backdate any decision. You'll need current directors or the trustee to ratify a prior interaction. It may be that a decision you're ratifying had different directors at the time, but whatever you're ratifying at the current time is the decision that the directors are beholden to.

Change GPS makes it easy to expand your services

No matter what size your practice, today's innovative technologies lets you expand your business – and helps you work smarter, not harder. One way to expand your services is by offering clients estate planning strategies. Change GPS Specialist Accounting Software provides standardised tools, templates, and workpapers to streamline and simplify the estate planning process, boosting efficiencies while lowering costs. Once set up, you’ll be well-positioned to take advantage of opportunities as they arise.

Find out more by contacting us now to book a no-obligation free consultation.



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