Partner’s Opinion – Chris Smith
Whilst asset protection is arguably a matter of law in principle, on reviewing balance sheets of clients at least annually we often see the need for a legal discussion around asset protection in order to reduce Directors’ personal asset holdings.
Typically the appropriate vehicle for that—in respect of share ownership, investments and property—is a Trust, often referred to as a Family Trust. Where corporate affairs are more complex there can be discussion required as to the justification for a Business Trust to hold non personal assets.
The most common scenario is for clients to transfer their real estate, personal investments and shares in their own companies into a Family Trust. Once settled upon, it is common for a large part of the advance created to be gifted, creating the Trust equity and asset. It should be noted there is a two year period that the Official Assignee can claw back gifts so it is important to consider the status of any gifting at least annually for an asset protection programme to be working effectively. If a donor were to be insolvent at the time of making a gift the claw back period for a gift is five years. Completion of a solvency certificate at the time of gifting is prudent.
Not only does a Trust owning shares create protection of the underlying asset, there is also instant protection of retained earnings on declaration of dividends. The Trust owns the shares and also the retained earnings at that point. Consideration should be given to a security agreement over any current account the Trust has in the Company following dividend policy, thereby making the Trust a secured creditor of the Company.
Depending upon the shareholding relationships of the Trust and associated shareholder agreements and also contingent liabilities in the form of guarantees that may be required, there can be an argument for a Business Trust. That has the effect of separating business assets and their risks, created by the aforementioned exposures, from personal family assets. In the event of a civil claim for example, under a shareholder agreement, personal assets would not be as close to the claim. The commercial justifications for such extended asset protection need to be considered on their merits.
Discussion as to asset protection will require input from your solicitor, however, as aforementioned commercially we do sometimes notice the need for at least that discussion. The above provides a brief insight; should you wish to discuss your positions further please contact us.
