|
NEWS - PLANNING
A guide to protecting your assets
9/20/2004
It's a fear that many people share. The thought of a forced sale of your most valuable assets - particularly your family home - to pay debts arising from a business failure, or from being sued for professional or business negligence, or damages from some other unexpected event.
It's a risk that prompts people such as self-employed professionals and company directors to establish complex strategies that seek to shelter family assets from liability risks that may arise from their work.
The most often-mentioned strategies include steering these assets into a family trust that is controlled by other family members who are not at risk. So long as the strategy is not employed on the brink of a financial disaster, it can protect family assets from creditors. Another strategy is putting the assets into the names of family members not at risk, especially a spouse.
These are measures at one end of the risk spectrum for those who consider themselves to be in high-risk occupations, as they do involve certain financial trade-offs. For example, a family home in a trust is not exempt from capital gains tax and is liable to be assessed for land tax as an investment property.
There are other strategies that will protect family assets, in particular making use of insurance. Professional indemnity insurance and insurance for company directors and senior executives separate work risks from personal assets. Other lesser known types of insurance, like public liability insurance, can also protect family assets against unexpected financial demands. However, a problem that often arises with such risk insurance is a lack of familiarity with the policies. Being ignorant about insurance can be an expensive exercise.
Consider the following examples.
You run a small business from home. A client falls down the stairs, suffers back injuries and sues you directly for damages. You discover your home insurance won't protect you against this.
A visitor to your hobby farm rides a trail bike around the make-shift dirt track the kids have built and is seriously hurt. This innocent fun that ends in misfortune is compounded by your insurance company baulking at covering it, leaving you personally exposed to sizeable damages that could bankrupt you.
An event causes damage to someone else's property that you thought was covered by your insurance. Perhaps your family pet causes an accident. But you discover your insurer changed its policy with regard to such claims a couple of years ago and you have overlooked this. Suddenly and unexpectedly, you are up for a lot of money.
While these might be described as worst-case scenarios, they nevertheless highlight the possibilities. Being sued for damages to the point of bankruptcy does happen, although it's not as common as a business collapse leading to bankruptcy, says Mark Robinson, a Sydney partner and a registered trustee in bankruptcy with insolvency specialists Prentice Parbery Barilla.
"The first layer in any protection plan against being sued for damages is commonsense risk management," says lawyer Peter Townsend, the senior partner at Peter Townsend Business Lawyers in Sydney. "You don't, for example, take your rottweiler for a walk in the park without a leash," he says. Nor should you let a visitor who has never ridden a horse jump on the back of the feisty pony you keep in a paddock on your hobby farm. You could say the same about letting someone with no experience drive a tractor, ride a motorbike or steer a motorboat. If you do, you should first make sure your insurance will cover you.
A protection plan should include being fully aware of your insurance cover and what it actually protects you against, says Peter Crump, the chief executive of Adelaide-based financial planner Portfolio Planning Solutions, which has an insurance broking division.
Crump says people need to keep up to date with their insurance arrangements given that an important change has been taking place over the past two or three years.
Up until crises like the HIH debacle, insurance was quite different. Insurers seemed to be constantly enhancing their policies in order to be competitive. Now the insurers call the shots, not only in increasing the cost of premiums but also in making restrictive adjustments to policies.
"Today it's more likely that restrictions are being placed on insurance policies, especially policies where business activity is involved," Crump says. This covers businesses being run from home and hobby farms where the owners are running some sort of rural business activity.
In both cases, the insurance cover is likely to be quite different to an ordinary home policy or a recreational hobby farm policy where there is no attempt at running a business.
Most ordinary home insurance policies, for instance, have built-in public liability insurance that covers such events as a neighbour or visitor slipping on a wet path and hurting themselves. The same goes if someone hurts themselves due to negligence on your part.
But if you're running a home business, you'll have to get separate public liability insurance in order to have insurance protection, or run the risk of being personally sued for any damages.
"What is covered by insurance is something you can't take for granted," says Crump. For example, many household policies will cover you if you become involved in a brawl and are subsequently sued for damages for assault. But business policies don't contain such cover. "People running a business are expected to behave in a different way," he says.
It is important to tailor your insurance to your circumstances, says Matthew McDonald, a senior associate and insurance specialist with Melbourne lawyers Hall & Wilcox. "If you have concerns about some of the activities you're involved in, it's a smart idea to check that you're covered," he says.
You particularly want to be protected against the risk of a damages suit that could result in bankruptcy.
Another strategy is directing your long-term savings and investment assets into superannuation. Superannuation assets up to the so-called pension reasonable benefits limit (RBL), which is just under $1.24 million per individual, are protected from creditors against the threat of bankruptcy.
It's always a smart strategy to ensure you are fully aware of the risks you take in your business, professional and personal life and to organise insurance that will provide cover against the various possible threats, says McDonald. Equally smart is checking your existing insurance cover to make sure it meets your lifestyle needs and that no nasty surprises will upset your plans and subject you to a distressing financial loss.
Reproduced from the Australian Financial Review - 20 Sep 2004
|
|
|
