Client Login

 

CPA

Rough Guide: Changes in Asset Protection Law

There are a number of relatively recent changes in legislation that in its various ways impacts on the capacity of individuals to ‘protect their assets’.  Asset protection methods used and asset protection plan made and implemented even 18 months ago will need to be reviewed.  The changes in their combined impact are substantial and your asset protection plan may as a result be in tatters – you may have no protection and no effective plan now.

The discussion in the resources selected below is a brief general summary of the changes, to assist you to consider whether you should get up to date professional advice in regards to your asset protection plan.

Bankruptcy Act Changes

Superannuation Changes

Family Law Changes impacting on the security of assets

Estates Changes

Bankruptcy Act Changes

On May 31 2006 the Bankruptcy Legislation Amendment (Anti Avoidance) Act was promulgated.  Important changes were:

Transfers at undervalue and Presumption of Insolvency

If a party has transferred an asset to a related entity for less than full value payment in return, and within 4 years that party becomes insolvent, the administrator may access the asset for the benefit of creditors.

There has been an increase in the time period relating to this power - from 2 to 4 years.  Note that the related entity includes beneficiaries and trustees of trusts that are related to the bankrupt or their spouse.  Of course it includes children, business partners, parents, relatives.

Where there are no bookkeeping and other records that would normally be expected  - there is a presumption of insolvency now.  The alleged bankrupt can rebut this - with the use of effective substantiation.

Transfers to defeat creditors

There is now no time limit on the power for an administrator to go back and access assets transferred from a bankrupt where they are transferred to ‘defeat creditors’. 

In addition there are now changes that mean it is much harder to use some old defences to the return of assets to administrators that the person who received the assets from the bankrupt was ignorant of the situation in relation to this provision.

Strengthening of capacity of the administrator or ‘Trustee In Bankruptcy’ to recover from other entities

The changes to the Bankruptcy Act mean that clients should structure their affairs to generate their income within the relatively lowest risk entities [wherever possible and compliant with regard to the broader provisions of the Income tax assessment act and the regulatory environment more generally (and in relation to their particular industry)].  Discretionary trusts with corporate trustees and appropriate company shareholding etc are seen by many legal practitioners as a lower risk entity – being harder to attack than a partnership or company director. 

In addition clients need to consider structuring new ventures in an appropriate manner and so as not to risk the assets and business income of stable and viable businesses. Even though this may not be as tax effective in some circumstances and appropriate development of new markets and services within the one business entity.

This is as opposed to the idea of earning income and then moving the assets resulting into low risk entities for protection purposes.  The changes to the bankruptcy act and the other related legal changes (including family law and jurisdictional changes) mean that these assets are easier for the Trustee In Bankruptcy to ‘claw back’ to be available to creditors of a bankrupt.

Superannuation Changes

Amendments to the Family Law Act dating back to December 2003 mean that super can be split between separating couples.  The process of doing the split is complicated and requires the services of a solicitor and a financial planner, each accredited in the area. So superannuation is subject to property settlements much more readily now.

Family Law Changes impacting on the security of assets

Family Court has power over de facto relationships

Property disputes between de facto couples used to come under the jurisdiction of the State Supreme Court, until this year.  Changes mean that the Family Court has this jurisdiction now. 

Family Court can order around a trustee of a trust

A family court from December 2004 onwards has the power to order a trustee of a trust (including a testamentary trust) to include a former spouse as a beneficiary – regardless of what the trust deed says.

Please note however that we are not aware of the court having ever used their powers to bust open a testamentary trust – that was protecting assets of a beneficiary child for instance from their own potential subsequent bankruptcy or property settlement.

Family court has power to change property interests and control around in relation to companies and trusts (including testamentary trusts)

As a result of these changes the Family Court has the power to order a company to transfer shares from one spouse to another.

The Family Court as a result of these changes under the legislation can alter the rights and property interests of third parties. For instance, third parties may also be shareholders or stakeholders in the company – potentially losers or winners outside of the marriage.  Alternatively the third party may be a trust and its stakeholders including a testamentary trust.

This is an important change as it was previously regarded that assets could be protected from marriage breakdown by separating the spouse involved who is trying to protect assets from any position in which the spouse can be regarded as controlling the trust, such as an appointer or trustee, or director of a trustee company.

However the constitutional validity of these provisions has been questioned and the legal community are expecting these to be challenged in the High Court.

Family Court has power to hear bankruptcy matters

In the Family Court gained the power to deal with assets of third parties to a marriage.

The family court now has exclusive power to deal with bankruptcy and family law matters where one of the parties of the separating couple is insolvent.  In the past if one of the parties was bankrupt the spouse could simply not benefit from the bankrupt’s assets.

Binding Financial Agreements

As a consequence of the Rich Case Amendments were made to the Bankruptcy and Family Law Acts.

A legitimate binding financial agreement can mean the transfer of assets to a former partner – resulting in the avoidance of creditors in a subsequent bankruptcy. Prior to the changes to the law abovementioned the instrument could be used even where the married couple are in fact on good terms and live together.  This is in fact exactly what Jodie Rich did – successfully defeating creditors in respect of those assets - hence the changes to the legislation.

Since the changes the circumstances where this could be used to protect assets are:

  1. There must be an actual separation or breakdown in the marriage

  2. Creditors can join in a family court proceeding – as outlined above die to the fact the Family court now has power to hear bankruptcy proceeding in these circumstances

  3. The bankruptcy act provisions must be considered in the creation of a binding financial agreement.

Estates Changes

Assets can be protected your whole life and then when you think you’ve passed them on to your beneficiaries as you intended they can be attached after you are deceased and directed to completely different beneficiaries.  This avenue is an area ripe for picking by potential claimants. 

Don’t forget the basics – a marriage, divorce, or change of permanent residency and jurisdiction of assets can mean the need for a new will being made – to prevent the possibility if dieing intestate.

A challenge to your or your family members is still very much available under Australian law.

There has been a change in the approach to family maintenance applications by the courts, so that the moral obligation of the person who has died and whose will is being challenged in this manner is not the emphasise.  However willsa re still very much able to be challenged by certain applicants - beneficiaries and those that should be beneficiaries as per the statutory model of beneficiaries of those dieing intestate (such as chi9ldren, spouses, ex and de-facto spouses, etc). Obviously you shoudl consult your solicitor for a professional opinion relating to your situation if you are concerned about this.

Thyese days the court will examine the validity of such a challenge by reference to other factors (not moral obligation).  Namely: The more support the applicant received from the deceased when they were living – the better for the applicant. Important factors considered by the courts in determining the application are:

1. Are the needs of other beneficiaries met and what is the relative need of these beneficiaries

2. Does the applicant have special need themselves (are they disabled for example)

3. Did the applicant assist the deceased to create the assets?

4. The finances of the applicant now and later

5. The value of the estate

6. Would a fair and reasonable person in the position of the deceased regard the provision for the applicant to have been sufficient?

How this approach applies in practice is difficult to ascertain without detailed reference to case law and a number of case studies - which is outside the scope of this ‘Rough Guide’. 

Some interesting considerations are provide below to show the wide variety of outcomes that can come from a family maintenance application and the need for legal advice in preparing a will and a lawyer involved in your estates planning team generally.

For instance it may be that a court will overturn a will that leaves assets in equal amounts to children where one child has a debilitating illness.  Alternatively where someone has become accustomed to a certain station in life and has expectations of a certain station in life – a duty on the estate can exist to continue to maintain the applicant in this manner.

It is very difficult in Australia to prevent an attack on your assets that comes via the will.  This is because of the legal rights of beneficiaries and those who should be in the eyes of the law beneficiaries.

How does someone challenge the will?

An applicant has 6 months from the date of death to give notice of intention to the executor.  Thereafter they have a further 3 months to file an application in the court.  In Queensland time limits are not based on the date of death.  In this complicated area recommend you seek the advice of a specialist legal practitioner.  We can provide a referral if you require.

A large range of persons can challenge a will using a family maintenance application process.  Major parties are: all beneficiaries, or parties that should be beneficiaries including children (including step-children), spouses (including ex spouses, de-facto spouses).  Was that fiancé in your eyes a de-facto in the courts eyes?  They can do so at the estates expense!

How to avoid or manage a challenge to your or your family members will

It is difficult to prevent a family maintenance application.  Some guidelines:

  1. Get a registered Tax Consultant, Certified Financial Planner and Registered legal practitioner each with relevant experience to work on your estates planning as a team – without one of these professions you are likely to have a gap in your approach that may leave your assets and estates intentions falling short.

  2. Inform your advisers of all possible claimants.  For instance, ex spouses, ex de-facto (including fiancé’s that you lived with but didn’t think you were de-facto, step children, estranged children – anyone you can think of.

  3. Make clear the reasons for providing a particular beneficiary a lesser share or no share of an estate.  Discuss these issues with your adviser who should advise whether to include in your will or in a memorandum.

  4. Include possible claimants with an equal share of the estate.  It may be less damaging to the estate than the costs and trauma of legal action, and the risk of an even greater share being awarded by the courts. You may use an insurance policy to fund this specifically.

  5. Where assets are considerable and other approaches are unreasonable advanced asset protection may be required – whereby the deceased divests all assets prior to death so that the will is not the instrument that transfers assets.

  6. A contractual agreement may be made with the potential claimant conditional on no family maintenance application being made – for the payment of a particular sum.  Again could be funded with insurance.