Asset Protection Planning 101
Asset Protection Planning should be part of:
• Your larger financial plan. It is critical to have a financial plan for both wealth creation and preservation.
• Your tax planning because it can have an impact on income taxes, estate and inheritance taxes
• Your larger estate planning because it can have an impact on spousal rights on divorce, retirement
The timing of Asset Protection Planning is critical for the plan to work. It must:
• occur in advance of specific creditor problems to be effective
• Legally fraudulent transfers are prohibited. These may include:
– o actual or creative fraud transfers with intent to hinder, delay, or defraud creditors. It should be remembered that asset protection planning is intended to protect assets from frivolent claims and not from legitimate creditors.
-o transfers for less than “reasonably equivalent value” while insolvent or having the effect of making you insolvent or leaving your business with unreasonably small capital. In Zimbabwe making transfers that make the company insolvent is a criminal offence according to both the Company Act and the Private Business Corporation Act.
– o transfers to pay debts owed to “insiders” while you are insolvent. However at times prudent and in time asset protection planning can happen through issuances of Preference shares which will have prior claim to payment before ordinary creditors in case of insolvency. There should be a clear demonstration of funds that purchased the Preference shares. An example is that Econet Wireless in Zimbabwe has a majority of preference shares in the name of the founder’s company. This means that the founder will have prior claim if the company goes insolvent.
A class case at an attempted fraudulent transfer was reported by Jason Lee in his book “Fast Tracking Your Retirement through Real Estate” whereby a man who had his business, five rental properties and his home all listed in his name was now faced with a claim from the bank for failure toservice his mortgage facility. He now wanted Jason a lawyer to rearrange his assets to avoid the claims coming from the bank. This Jason refused because it would be fraudulent asset protection to defraud the bank. But had the client separate his rental properties into separate companies his loss would have been limited. He could not do asset protection planning in retrospect.
The critical point is that implementation of asset protection strategy should happen during good times. By implementing any asset protection plan, you make your assets unavailable to satisfy creditor claims. If fraudulent conveyancing is suspected the courts may set aside your attempt to hide your assets and hand it over to your creditors. PLAN EARLY.
3. One should critically and accurately identify risks to be planned against. Some of these could be:
• Malpractice for professionals. If you are in the health profession for example you stand a risk of being sued for malpractice. It is therefore important to limit risk through either malpractice insurance and/or separation of assets. Therefore practicing as a sole proprietor is hazardous to one’s wealth.
• Business reverses. A friend in Australia recently posted on the Blog a story of his friend who had a loss of business due to an accident but was prepared because he had acquired a loss of income insurance policy. This therefore paid for lost income while he was recovering.
• Personal injury and public liability can be limited for by insurance products against accidents. In Zimbabwe it is required that if you run a business you carry a public liability cover in case someone is hurt accidentally within your business.
• Divorce though unwelcome should be planned for. In Zimbabwe the structuring of your marriage can be part of asset protection planning. For example a lady who accepts to be married under the Customary marriage act is assumed to have consented to polygamy and therefore this wastes resources. If one is married under the Christian or civil marriage act Chapter 5:11 then polygamy is not allowed and so the future of the wife and children is protected. Some men despite this illegally marry a customary wife though having a first wife contracted under Chapter 5:11. In this instance the second marriage is not recognized and they have no right to the estate in case of death of the husband.
• Taxes are one of the major risks to be planned for. Different strategies are appropriate for different risks and these will be discussed in detail in future posts. Enjoy and start planning now before its too late.