How to protect your equity in your house or assets against claims from unsecured creditors
In today’s world it is risky being in business. Your assets, including your house, can be on the line. One of the most effective strategies you can put in place to protect your assets is commonly referred to as a gift and loan back strategy.
This is a very tax-effective strategy and in its simplest form involves managing risk by removing the value of your assets, out of your name. Effectively, you remove the asset from a high-risk environment to a low-risk environment. High-risk broadly means where you are at a higher risk of being sued or otherwise having your assets subject to creditors.
The benefit of this strategy is that it can occur without transferring the legal ownership of the asset itself.
With proper planning, it can be a simple staregy to implement.
What kind of assets can be used?
Generally, this type of arrangement will involve real estate and a mortgage will be registered at the Land Titles office.
If no real property is available to be used, personal property can be used, and security can be registered with the Personal Property Securities Register (PPSR).
How does this occur?
Consider Dan owns one hundred per cent (100%) of an investment property.
The value of the investment property is $1 million. Therefore, the equity is $1 million.
By using a Trust or forming one and ensuring the correct documentation is prepared, the Trust becomes a secured creditor protecting the house against any unsecured creditors, if they pursue you.
The steps to the arrangement are:
- Dan owns 100% of his House valued at $1 million
- Dan lends $1 million to the DAN Trust
- The DAN Trust then lends the $1 million back to Dan
- The DAN Trust then takes a security over the House by way of a mortgage
Do I need cash to do this?
This strategy is often an internal one. There is no requirement for cash, and it is possible to use a negotiable instrument against the available equity in the asset.
What are the tax implications?
Generally, there are no adverse tax or stamp duty implications if the documentation is correctly prepared.
Can it be overturned in bankruptcy or at law?
Bankruptcy or corporate law clawbacks may occur where a gift or ‘under value’ transaction has occurred within five years of the party becoming insolvent.
This period is generally reduced to four years if the party can show they were solvent at the time of the transaction. For this reason, a solvency statement will generally be requested from your accountant.
However, if the transfer was done purely for the purpose of avoiding creditors, there is no limit on time.
What do I need to do?
- The arrangements need to be carefully discussed with both your legal and accountant/financial advisors
- The arrangement needs to be constantly reviewed to ensure any changes are accurately captured
- You have to be proactive about getting advice about the appropriateness of this type of arrangement so that the clock starts ticking on bankruptcy clawback times
- You must get advice to ensure the Trust that will make the secured loan does not itself conduct any risky business or other activities
- If there is a third party financier who already has a mortgage or security over the asset, they will generally require a deed of priority securing their lending as a first priority before the Trust’s second mortgage.
To effectively implement this strategy, you must ensure the legal documentation is correct. It will include a deed of gift, loan contract and a mortgage or security document. It may also require consultation with your financier if there is a loan or mortgage over the asset to ensure they consent to the arrangement.
How do I start a gift and loan back strategy?
At FC Lawyers, we have acted for a wide range of clients and worked with their accountants and financial advisors to put these arrangements into place.
Contact our team today to discuss your current situation.