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It is all well and good to have a property portfolio that delivers good capital growth and positive cash flow but the key principle that will validate your long-term success is asset protection for real estate.\u00a0<\/p>\n
Protecting your real estate assets is perhaps more important than building them. Obviously we always hope for the best, but there are many things that can go wrong and when they do, you and your assets are at risk.\u00a0<\/p>\n
Incorporating prevention measures into your investment strategy<\/a> could be the difference between you continuing to build out your wealth or losing everything you own.\u00a0<\/p>\n In essence, protecting your real estate assets is a means of shielding them from being used to meet creditor\u2019s claims.\u00a0<\/p>\n Any business has risks and you need to make sure you are well prepared for anything that gets thrown your way. Here are just a few scenarios in which asset protection would be needed:\u00a0<\/p>\n Asset protection will ensure that any business risk you may experience will remain separate from your family and your personal assets.\u00a0<\/p>\n To reduce that vulnerability, it is vital that you implement strategies to protect your property and personal wealth from potential loss of control.\u00a0<\/p>\n It is fairly common for people to think that they don\u2019t have to protect themselves. It is within our human nature to assume that no one is out to get us. But to tell you the truth, if you own even just one asset, you are at risk of losing it.\u00a0<\/p>\n Assumption one: Only the rich protect their assets\u00a0<\/p>\n Contrary to popular belief, the rich have less of a need for asset protection because they have a larger capacity to pay the judgement and move on. Whereas an investor who has just started out in their journey would be much more susceptible to losing everything if they were to go up against the creditors tomorrow.\u00a0<\/p>\n Assumption two: If you\u2019re sued, you can transfer ownership to a family member<\/p>\n Transferring your assets to your spouse and\/or children, especially after something has happened, will not protect your assets. The court will follow the paper trail and it will be deemed that the family member is holding those assets on your behalf.\u00a0<\/p>\n Assumption three: Asset protection is expensive\u00a0<\/p>\n Protecting your real estate assets is relatively inexpensive. It is a lot cheaper than the legal fees associated with defending yourself in court. So set aside some funds in your budget and invest the time into building an asset protection strategy that works for you.\u00a0<\/p>\n A \u2018structure\u2019 refers to the way in which you choose to hold title to your investment property(ies). Most investors choose to buy under their own name \u2013 it is the least expensive and least complicated method, however it can leave your assets open to risk.<\/p>\n There are four main structures that are used within real estate: individual name, company, partnership or trust. Each structure brings their own benefits and downfalls to the equation. It is recommended that you seek professional help before determining which structure is right for you as they will all vary depending on your situation.\u00a0<\/p>\n Ideally you want to get it sorted from the beginning of your real estate journey because your chosen structure will impact things like debt restructuring and retirement planning.<\/p>\n Individual name\u00a0<\/p>\n This is the most common means of ownership. The benefits and drawbacks apply whether the investment property is held solely or jointly.<\/p>\n Pro\u2019s<\/strong><\/p>\n<\/td>\n Con\u2019s\u00a0<\/strong><\/p>\n<\/td>\n<\/tr>\n Easy and inexpensive to set up.\u00a0<\/p>\n<\/td>\n Assets are completely at risk – there is no protection from creditors.\u00a0<\/p>\n<\/td>\n<\/tr>\n Simple to manage capital gains and rental income because it is included in investor’s personal tax returns.\u00a0<\/p>\n<\/td>\n When the portfolio shifts from negative to positive gearing this adds to the investor\u2019s individual tax liability.\u00a0<\/p>\n<\/td>\n<\/tr>\n Tax effective, especially if the property is negatively geared.\u00a0<\/p>\n<\/td>\n<\/tr>\n Eligible for capital gains tax discount if you own the asset for at least twelve months.\u00a0<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Partnerships\u00a0<\/p>\n Partnership structures do have several advantages in terms of setup and ongoing costs. However, it does not provide any real asset protection. Whilst partners are not subject to\u00a0directors duties<\/a>, each partner does owe fiduciary duties towards one other.\u00a0<\/p>\n Pro\u2019s<\/strong><\/p>\n<\/td>\n Con\u2019s\u00a0<\/strong><\/p>\n<\/td>\n<\/tr>\n Simple structure and relatively inexpensive to set up.\u00a0<\/p>\n<\/td>\n Taxed as its own entity that must be filed separately.\u00a0<\/p>\n<\/td>\n<\/tr>\n Tax is not paid, however income is distributed to partners.\u00a0<\/p>\n<\/td>\n Income distribution is limited to what is determined in partnership agreement.\u00a0<\/p>\n<\/td>\n<\/tr>\n Tax effective, especially if the property is negatively geared.\u00a0<\/p>\n<\/td>\n You do not have protection against claims.<\/p>\n<\/td>\n<\/tr>\n If a claim is made against one partner, all assets are at risk.\u00a0<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Companies\u00a0<\/p>\n A company structure can provide you with good asset protection for your real estate. However, on the downside, they are a bit more costly to set up and operate.\u00a0<\/p>\n Pro\u2019s<\/strong><\/p>\n<\/td>\n Con\u2019s\u00a0<\/strong><\/p>\n<\/td>\n<\/tr>\n Tax rate is 30% on profits (good for high-income earners).\u00a0<\/p>\n<\/td>\n There is no capital gains tax discount.<\/p>\n<\/td>\n<\/tr>\n As a shareholder your liability is limited to your contribution to the company.\u00a0<\/p>\n<\/td>\n Setup and maintenance costs can be high – accounting and tax.<\/p>\n<\/td>\n<\/tr>\n All profits have to be distributed equally among shareholders.<\/p>\n<\/td>\n<\/tr>\n Losses must be offset against future income.\u00a0<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Trusts\u00a0<\/p>\n A trust is not a separate legal entity according to law. It is a relationship where a person (the trustee) is under an obligation to hold property for the benefit of other persons (the beneficiaries).<\/p>\n Trusts are a key strategy that real estate investors use to protect their assets. The beneficiaries do not own the assets which means creditors will have a difficult time making a claim against them. It also protects your assets against potential divorce of your children and grandchildren, keeping the assets within the family.\u00a0<\/p>\n A trust structure also benefits from the 50 percent capital gains discount. A tax downside to trusts is that it cannot distribute losses to beneficiaries. Any loss remains within the trust, and this can limit the benefits of negative gearing.<\/p>\n While trusts can be an effective strategy for asset protection, the finer details can be complex and there seeking professional advice is paramount.\u00a0<\/p>\n There are 4 main types of trusts:<\/p>\n The term \u201cdiscretionary\u201d in reference to a trust involves the powers that the trustee has in deciding which beneficiary(ies) receive the net income from the trust either annually or at one time, depending upon the terms of the trust.<\/p>\n The most common type of discretionary trust used is the Family Trust. This kind of trust will have a trustee which holds the asset(s) in trust for the benefit of the family members (beneficiaries).<\/p>\n For tax purposes, a discretionary trust generally provides the most flexibility when it comes to net income because the trustee has the discretion to distribute different amounts of income to different beneficiaries. Depending on the trust deed, a similar flexibility may also apply to the distribution of any capital gain to the beneficiaries.<\/p>\n In a unit trust, the beneficiaries\u2019 rights to income and capital in the trust are fixed. In other words, a trustee is required to manage the trust according to the number of units each investor holds.\u00a0<\/p>\n The beneficiaries in this kind of a trust are known as \u201cunit holders\u201d. There may be differences in voting rights, income and capital distribution rights, etc depending on the fixed interest each unit holder has.\u00a0<\/p>\n As you might imagine, a hybrid trust takes the best of both worlds (unit trust and a discretionary trust) and combines them to create a powerful and flexible tax planning vehicle.\u00a0<\/p>\n A testamentary trust is a trust that is created by your will, it manages your affairs after you\u2019ve passed on.\u00a0<\/p>\n Superannuation funds\u00a0<\/p>\n It has become increasingly popular for people to manage their own superannuation funds (SMSF) because it allows an investor to have full control of their retirement assets. If the goal of your property portfolio is to save for retirement, then adding real estate to your SMSF might be a part of your strategy.\u00a0<\/p>\n The concept is similar to other types of trusts, however this kind of trust is only meant to provide funds for the retirement of the trust members (the beneficiaries).<\/p>\n While having control over your own super can be appealing, it’s a lot of work and comes with risk. While it may protect your assets from potential creditors, you still will be personally liable for all decisions made and if you were to lose money through theft or fraud you wouldn\u2019t have access to any compensation or the Australian Financial Complaints Authority (AFCA).<\/p>\n If an SMSF is something you are interested in, please seek professional advice from a lawyer and tax accountant.\u00a0<\/p>\n INSURANCE\u00a0<\/p>\n Insurance cannot protect you against every possible scenario but supplemented with the right structure, you can sleep peacefully at night knowing that you\u2019ve got the best strategy in place to reduce the vulnerability of your assets being at risk.\u00a0<\/p>\n The main insurance type that would benefit most real estate investors is \u2018landlord insurance\u2019.<\/p>\n Landlord insurance<\/strong><\/p>\n Landlord insurance is a type of home insurance that protects your investment property if it is destroyed or damaged. You also have the option to insure for things like loss of rent, tenant default and malicious damage. If you have leased any of your belongings to your tenants you can protect this with contents insurance.\u00a0<\/p>\n Insurance cover will vary by company so it is really important that you always review the relevant Product Disclosure Statement (PDS). That way, you can make sure the policy you\u2019re purchasing covers the events you want protection for.<\/p>\n Now with this knowledge, you can understand and appreciate the importance of asset protection in regards to your wider investment strategy. The best way to know how to protect your real estate assets is getting the right help.\u00a0<\/p>\n Asset protection is not a one size fits all approach. Your strategy needs to be customised to suit your lifestyle needs which will require expert advice.\u00a0<\/p>\n With the right team you can develop and execute a master plan that will ensure your property portfolio is well protected. Come along to one of our\u00a0free real estate investing seminars<\/a>, ask our team questions and connect with industry experts that can help you streamline your real estate investment strategy.\u00a0<\/p>\nWHAT IS ASSET PROTECTION?\u00a0<\/h2>\n
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COMMON ASSET PROTECTION ASSUMPTIONS\u00a0<\/h2>\n
CHOOSING THE RIGHT STRUCTURE\u00a0<\/h3>\n
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SPEAK TO AN EXPERT ABOUT HOW TO PROTECT YOUR ASSETS\u00a0<\/h3>\n