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Asset protection planning - what is it and why is it important

Julianne Leybag
26 June 2017 3 minute readShare
Money, lifeline, heart rate

On average, Australian business owners get sued three times in their lifetimes—with a great chance one of these lawsuits having a devastating effect on both personal and business assets.  One way business owners can use to protect their business is via asset protection planning.

Owning and/or running a business can expose business owners and their assets to certain risks.

Business owners should apply asset protection planning: whenever they plan investment strategies, in order to keep their properties and assets safe from being taken away by someone who wins a lawsuit against them.

These lawsuits can range from negligent acts performed by the business owner, such as a breach of contract, to lawsuits relating to property foreclosure, such as when they have stopped paying their commercial property mortgage.

An effective asset protection strategy also includes the prevention of a spouse or de facto partner from obtaining business assets in the event of marital problems, family breakdown or divorce.

Learn more about protecting assets in a de facto relationship.

Here’s how business owners can start on asset protection planning:

  • Separate personal and business assets and liabilities
  • Reduce and/or eliminate tax liabilities
  • Avoid probate on your business
  • Regularly update your estate and business succession plans
  • Select the best insurance coverage for your business
  • Utilise dedicated asset protection tools
  • Structure asset protection trusts
  • Combine legal tools

Separate personal and business assets and liabilities

Business owners should be able to separate their business assets and liabilities from their personal ones. But this means not be complacent and refraining from using their business credit card for personal expenses.

It is important to consider and, where possible, account for future consequences when making a decision on anything involving business or personal assets.

Reduce and/or eliminate tax liabilities

Business owners must make sure to leave behind a will or testament that specifies and sets their assets in clarity, including the inheritance rights of the family with respect to the owner’s share in any business.

If business owners fail to create a will,  their rights will be determined by legislation which may prove unsatisfactory to their loved ones. Business owners should plan ahead and instruct the splitting into separate entities of the business after their death, specifying individual ownership structures to reduce, if not completely eliminate, tax liabilities.

Avoid business probates

In the absence of a trust as a small business owner, the company will immediately go into probate after the owner’s death, as required by legislation. This may prove disastrous to the owner’s kin.

Probate allows the court to take control of the business—sometimes for a year or more—making it a necessity for the heir(s)/the new business owner(s) to first seek the court’s approval for every business decision.

All of these complications can be avoided if the business owner is able to create a living trust. The trust will pass ownership of the business to the designated heir(s) without going through probate, effectively eliminating the risk of having the court taking control of the company.

Regularly update estate and business succession plans

Business owners should develop a specific estate plan for their personal life and a comprehensively up-to-date succession plan for their business to maximise their company’s value and tax strategies.

Inspect and review the estate plan whenever there is a significant change in one’s assets, liabilities, marital status or something simple such as a change of address. Set a regular appointment with a lawyer and accountant to look into the current situation and appropriate necessary adjustments.

Business owners should also seek the assistance of accountants and lawyers that can help make important decisions on ownership and business objectives. Doing so will help determine and plan their retirement and post-business ownership goals.

Select the best business insurance coverage

Business owners are encouraged to use liability insurance, property insurance and find an umbrella policy that secures their business in case of any eventuality. Liability insurance cover damages for personal injuries and property damages caused by other people.

Business assets are mainly covered by property insurance and can include inventory coverage. If the property insurance doesn’t cover inventory, business owners may opt for a separate policy for their stocks. Another option is to consider an umbrella policy for exposure that goes beyond the auspices of their property insurance.

If something unprecedented happens, business owners can be assured that their cash flow isn’t affected or totally wiped out since they have insurance policies in place to protect them from these kinds of emergencies.

Utilise other dedicated asset protection tools

Another way for business owners to defend their business against lawsuits is by using limited liability companies and/or corporations. Aside from the obvious benefit, they also offer several tax advantages via business deductions.

If business owners get personally sued, limited partnerships, LLCs and trusts when properly structured, protect the business from possible devastating legal consequences.

Business owners should begin crafting their asset protection plan as soon as possible: the good times are the best time to prepare for possible dangers business owners could face in the future.

Asset protection planning - what is it and why is it important
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Julianne Leybag

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