Asset protection through a gift and loan back strategy

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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:

  1. Dan owns 100% of his House valued at $1 million
  2. Dan lends $1 million to the DAN Trust
  3. The DAN Trust then lends the $1 million back to Dan
  4. 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.

The information provided in this article is for general information and educative purposes in summary form on legal topics which is current at the time it is published. The content does not constitute legal advice or recommendations and should not be relied upon as such. Whilst every care has been taken in the preparation of this article, FC Lawyers cannot accept responsibility for any errors, including those caused by negligence, in the material. We make no representations, statements or warranties about the accuracy or completeness of the information and you should not rely on it. You are advised to make your own independent inquiries regarding the accuracy of any information provided on this website. FC Lawyers does not guarantee, and accepts no legal responsibility whatsoever arising from or in connection to the accuracy, reliability, currency, correctness or completeness of any material contained in this article. Links to third party websites or articles does not constitute any endorsement or approval of those sites or the owners of those sites. Nothing in this article should be construed as granting any licence or right for you to use that content. You should consult the third party’s terms and conditions of use in relation to any third-party content. FC Lawyers disclaims all responsibility and all liability (including liability for negligence) for all expenses, losses, damages and costs you might incur as a result of the information being inaccurate or incomplete in any way. Appropriate legal advice should always be obtained in actual situations.


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