How to protect your family home from creditors

How to protect your family home from creditors

Running a business always involves risks. The sooner you understand this, the more prepared you are to reduce or eliminate your exposure to these risks and safeguard the things you’ve worked hard for—especially your family home.

It’s not always smooth sailing running a business. When times get rough, you may need the assistance of creditors and lenders. This is a reality in business ownership and management.

Make sure however that you protect the things most valuable to you from your creditors—especially your family home. Here’s how:

  • Sign over majority ownership of home to unexposed partner/person
  • Undertake borrowings and allow related charge to be made over the main residence
  • Use a service entity
  • Understand the system
  • Establish multiple structures

Sign over majority ownership of home to unexposed partner/person

Also known as “the couple’s strategy” as it typically involves a spouse, this asset protection method is done when you give majority of your family home ownership to your spouse (or, if you’re single, to family or a person you trust) who faces less or no risk of litigation and other legal attacks from creditors.

Bear in mind that you must still retain some interest in your family home so you’re sure that your property can’t be pursued without your consent or authority.

This method helps you effectively disassociate yourself from your family home, thus reducing the risk of losing it to your creditors.

Undertake borrowings and allow related charge to be made over the main residence

This method works by making available very little equity in your family home to an external party.

A caveat: as the value of your property rises and as equity is also built in it, expect a greater risk of exposure to your creditors. You can mitigate this by regularly refreshing the charge and seeing to it that not much equity is made available to someone with a litigation or legal attack threat.

Use a service entity

Besides the asset protection it offers, a service entity also allows for tax advantages. This can be done by establishing the service entity’s ownership (or a degree of ownership) on some of your assets—business equipment, manufacturing plants, or even some ownership of your residence, too.

By separating these assets, you limit the risk of losing them to someone who launches a legal attack against you due to, say, him or her receiving faulty goods or services from you.

Since the said assets are owned by another legal “person”—your service entity—it can then be argued and established that the individual launching the legal attack cannot pursue these assets as he or she has never had dealings with your service entity (that owns said assets); instead, he or she has had dealings with you.

Bear in mind though that the taxation authorities keep a very close watch on the rates service entities are paid, so make sure payments made are appropriate and never only artificial.

Understand the system

As self-explanatory as it is important, thoroughly understanding the system helps you determine your own asset protection needs, and then develop a comprehensive asset protection plan to safeguard your family home and other assets.

When someone sues you, their lawyer usually pores through the asset registry. If your name’s not listed with your asset, there’s nothing they can pursue—it’s that simple. And even if your name’s on it, but the asset comes with mortgages and other legal/financial challenges and/or complications, their lawyer would deem it unwise to pursue said asset.

Here, a thorough understanding of how you can “work around” the system legally springs from thoroughly understanding the system itself. Simply, it’s doing your homework and doing it well.

Establish multiple structures

Multiple structures allow you to fortify the walls of your maze that safeguards your assets. This means you separate risks of being sued with your assets by determining which asset or property goes to which trust.

For example: if you own a property—say your family home—put up one trust for it. Establish a second trust for your trade shares, and another trust for your business.

The separate trust systems enable you to reduce risks and exposure while allowing you to maximise on the advantages and benefits each trust offers.

Always bear in mind that the most successful asset protection systems are planned long before any complications arise. If you haven’t yet, now is the best time to start identifying your asset protection needs and then developing the asset protection scheme that best suits these needs. As cliché as it may sound, it’s true the good times are still the best time to prepare for tough days ahead.

How to protect your family home from creditors
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