Effective Asset Protection Strategies: Yours vs Ours

What is yours is mine?

Asset protection is a critical consideration for individuals seeking to safeguard their wealth from potential creditors and other financial risks. Among the most significant assets is the family home. Protecting this asset should be at forefront of any asset protection strategy.

There are several approaches to asset protection, and although no strategy is 100% effective, it is a common strategy to divide spouses into two categories: the “low-risk” spouse and the “at-risk” spouse. By placing assets in the name of the “low-risk” spouse, it shields the asset from potential creditors of the “at-risk” spouse, who may be a business owner, director or professional focused on building wealth and running their business.

Another benefit of the “low-risk” spouse holding the assets is that may provide tax advantages, particularly in cases where there is difference in income between spouses.

Who May Benefit From Asset Protection Strategies?

As a business owner, professional or director, your assets are at risk of potential creditors, including those of your business and any statutory obligations arising from your role as an employee or director of a company. Creditors may include suppliers, lenders, the Australian Taxation Office (ATO) or a trustee in bankruptcy.

The protection of assets is a crucial consideration for professionals, not only to safeguard against personal creditors but also those in your business. As such, taking necessary measures to protect your assets is essential.

Is This Strategy Effective?

While removing legal ownership of an asset from the “at-risk” spouse’s name may appear to be an effective strategy to avoid creditor’s claims against an asset because it is held in the name of the “low-risk” spouse. However, the “at-risk” spouse may still be treated as a beneficial owner of an asset under the law of equity even if they lack legal ownership as a result of the presumption of resulting trust. The presumption of resulting trust generally arises where:

• a person purchases an asset in the name of another, or in joint names but the other person does not contribute any money to purchase the asset; or
• the money to purchase the asset is contributed jointly by two persons, but only one of the person’s name is registered on title.

In the absence of evidence of contrary intention, a resulting trust is presumed to arise. This means that the person who contributed money to purchase the asset did not intend to “gift” their contribution to the other person.

If a resulting trust is established, a creditor of the “at-risk” spouse may be able to claim against an interest in the asset even if the asset is in the name of the “low-risk” spouse. The presumption of resulting trust can be a useful tool for creditors and trustees in bankruptcy to target assets that are not in the name of the debtor, particularly where the actual intention of the parties may be difficult to determine.

How To Avoid A Creditor Establishing A Resulting Trust? 

Despite the presumption of resulting trust, the law of equity recognises there are circumstances where a person may wish to advance the prospects of another without seeking anything in return, this is referred to as the presumption of advancement. This doctrine can be used when a creditor raises the argument of resulting trust to make a claim on a property asset like the family home.

Does This Law Apply To All Relationships? No. 

Nonetheless, the presumption of advancement has been criticised for being narrow, controversial and outdated since it only recognises a man’s desire to advance his wife (including fiancé) and a parent’s desire to advance a child, while excluding similar relationships including where a wife purchases a property held by her husband, or de facto or same sex relationships.

Commissioner Of Taxation v Bosanac 

In the case of Commissioner of Taxation v Bosanac, the Commissioner argued that Mr. Bosanac had advanced funds to his wife to purchase a property, which was then held on trust for him. The Commissioner claimed that Mr. Bosanac was the beneficial owner of the property and liable to pay tax on the rental income received from it.

Initially, the Federal Court found that the presumption of advancement applied and that Mr. Bosanac had intended to gift the property to his wife, so it was held on trust for her with no beneficial interest for Mr. Bosanac. However, the decision was appealed to the Full Federal Court, which ruled that there was insufficient evidence to support the presumption of advancement. Instead the Court held that the property was held on a resulting trust for the husband as the beneficial owner of the property, as the funds used to purchase the property were loans to his wife and not a gift.

The case was then appealed to the High Court which concluded a protracted debate on whether to apply the presumption of resulting trust or presumption of advancement in the context of the family home. Instead of applying either, the High Court articulated the weakness of both presumptions and highlighted the importance of analysing the objective fact of the situation.

Key Takeaways From Commissioner Of Taxation v Bosanac 

The Bosanac case highlights that relying solely on registering the family home in the name of the wife may not provide adequate protection from creditors' claims against the husband as court move away from any presumptions and instead looks at all the relevant facts to infer intention. Important attention must be made to the intention of both parties to determine if a resulting trust will arise.

Given this development, couples should document their intentions regarding property ownership to prevent any future creditor disputes from arising. Bankruptcy trustees may now scrutinise the circumstances surrounding a property purchase more closely, rather than simply accepting the presumption of advancement.

3 tips to reduce the risk against assets 

To minimise the risk of creditors claiming a resulting trust against assets, couples in eligible relationships can take certain steps when purchasing or transferring assets to the “low-risk” partner. Consider the following tips:

Protecting one's assets from potential creditors and financial risks is a crucial consideration for professionals. Various strategies can be adopted to provide asset protection, including placing assets in the name of the "low-risk" spouse, which may also provide tax advantages however the law intervenes to prevent the misuse of such strategies.

Creditors can use the presumption of resulting trust to target non-debtor-owned assets, but this can be avoided by documenting asset ownership intentions.

All people in relationships can take pre-emptive asset protection focused measures, such as structuring their affairs before commercial risk-taking or asset transfer and to minimise the risks with creditors.