Separation Anxiety

The importance of separating risk from assets

When clients have dedicated blood, sweat and tears towards building their personal and professional asset base, there is an important discussion to be had around the fragility of those assets in a world where half of businesses and a third of marriages are unlikely to survive.

Accountants are more likely than most other advisors to intimately understand their clients’ family and business workings. As such they are in a prime position to consolidate their lead advisory role and provide more value for their clients by adding practical risk management advice into their structuring considerations.

Although historically lawyers have vacated the tax field and left the heavy lifting to accountants, the reality is that the recent propensity for courts to look through structures means accountants are not always well equipped to provide the types of advice that their clients really need in regards to protecting their assets. So, whilst a sound working relationship with a lawyer is a necessity at times, there are also a number of basic concepts that can be considered and applied when formulating structures for clients.

Time and capacity constraints can often lead to the use of familiar standard structures which may not take into consideration the available options or the clients’ real needs. No one size fits all when it comes to determining the structure. Asset protection demands individual responses, and, like financial advice, needs to be tailored to each client’s professional and personal situation.

This requires a holistic approach and cannot be left to habitual structuring in the hope that this will be effective.

The world in which we operate

There are two faces to the world of asset protection:

  • the assets clients are building in their business, typically small or medium businesses; and
  • their personal asset base.

Although the number of business insolvencies are at an historical low, and divorce rates have declined in recent years, there is no escaping the fact that hard earned assets are potentially exposed in instances where businesses don’t survive or personal relationships break down.

Small and mid-sized businesses constitute 99% of all companies operating in Australia and employ between them almost three quarters of Australian workers. Small businesses are defined as companies employing up to 19 staff and generating revenues of up to $10 million, whilst mid-market companies employ up to 200 staff and have annual turnovers of $10 to $250 million.

The survival rate of Australian businesses, the vast majority of which are small or mid-sized, is around 50%, with a business exit rate of 12.4% in 2014-15. Exit rates were highest for businesses with turnovers of less than $50,000, and lowest for businesses turning over $2 million or more. Trusts were the most likely to survive in the four years from June 2010, as compared to companies, sole proprietorships, partnerships and public sector businesses.

The Australian Financial Security Authority’s (AFSA) March 2016 quarterly figures show a 2% increase in personal insolvencies from the same quarter in 2015, with just over 16% of debtors entering a business-related personal insolvency.

The most common reasons cited for insolvency are:

  • Economic conditions, excessive drawings and lack of business ability for business-related bankruptcies; and
  • Unemployment or loss of income, excessive use of credit, and domestic discord or relationship breakdown, in the case of non-business related bankruptcies.

In terms of personal relationship breakdowns, the divorce rate as at 2014 sits at 2.0 per 1,000, with about one in three marriages likely to end in divorce. On average marriages are lasting longer at 12.1 years compared to 10.7 in 1999, and the age at which Australians are getting married has increased over the past 20 years. What this means in terms of assets is that there has been a longer period over which to accumulate them, making it even more important to protect them and any links they have to businesses operated by clients.

Australian Financial Security Authority, “Business and non-business related provisional personal insolvency activity” (March 2016)
Australian Bureau of Statistics, “3310.0 – Marriages and Divorces, Australia, 2014”
McCrindle, “Fast facts on marriage” (February 2015)

Asset protection or structure bust

Wealth creation is the big catch cry in the financial planning sector, but its true relevance to clients in the world of the accountant is perhaps even greater, although with a different set of pressure points.

Some would say that the best form of asset protection is to have no assets, but that’s simply not always realistic or possible. There are numerous very practical strategies to minimise risk to valuable assets, including:

  • Using separate entities, one to conduct the trading “risk” activity and another to hold business assets;
  • Ensuring a mix of directors/controllers for different entities;
  • Ensuring effective management reporting and accounting;
  • Good governance processes;
  • Adequate insurance;
  • Good funding resources and/or facilities.

What is Risk?







Risk and bust

“Risk” may take many forms, but most commonly we mean the risk of being sued.
We have to stop believing there is a perfect solution to risk or risk mitigation. Every structure has its own strengths and deficiencies, and we know that clients don’t or won’t tell us everything or keep us informed when their circumstances change.

Think like a litigator

Let’s start with the basic proposition that everyone wants a piece of you when you are in business. They want service, professionalism, confidence, value for money – in short, all the things that anyone wants when dealing with a business. At the back end of this is the need to believe that whatever you advise should be safe (or as safe as it can be) and cost effective.

The basic premise of asset protection is that we have to assume the worst case scenario and then identify ways to mitigate the risk. Mostly, getting it right takes skill and experience and providing a balance between total control and none.

What litigators do is to try and poke holes in asset holding structures in order to recover for their client (the one that’s suing the structure). Litigators usually appear after a risk has materialised. For that reason they have a better view of:

  • the quantum of a potential liability;
  • the ability of the subject to pay a claim; and
  • the assets available to discharge the claim. It’s this last point that dictates the need to reverse engineer a client’s view of Asset Protection on the assumption that identified risks have in fact materialised.

To apply their thought processes is to anticipate where the weaknesses lie.

Who's going to sue?


Estranged Spouse


Bankruptcy Trustee



Business Partners

Everyone is a claimant

Virtually every person that comes into contact with any business is a potential claimant. Some common examples:

Australian Taxation Office

The ATO is an active litigator when it comes to unpaid tax or SGC. Usually its remedy manifests in bankruptcy proceedings against individuals and/or the appointment of a liquidator where a company is liable for unpaid tax.

Estranged spouse

When marriage breakdown intervenes, both parties want to ensure their fair share is made available. The Family Court of Australia has extensive powers to make orders to divide assets (personal and business) or to take into account a person’s access to trust or company assets as a financial resource for the purpose of maintenance orders.


These people are in business and want (and need) to be paid.

Bankruptcy Trustee/Liquidator

Trustees and liquidators have a legal obligation to recover all available property of the bankrupt/insolvent company for the benefit of creditors.


Often customers will be dissatisfied with the goods or services for which they have paid. Occasionally customers or third parties may sustain some economic or personal/property damage as a result of dealing with a particular business. In the case of a professional services business, this may take the form of a negligence action.


Employees who have unpaid entitlements, or who are injured at work, may make a claim against a business owner.

Business Partners

When business partners fall out claims are often made one against the others. Sometimes this can pull in the business partners’ spouses, particularly where there’s divorce on the horizon or the death of a business partner. Understanding the risks that peripheral events can present makes for an appreciation of the benefits of having in place well constructed governance agreements, buy/sell arrangements and business succession plans.

Separating assets from risk

When we discuss “asset protection”, we are really talking about separating valuable assets from risk. Separating personal wealth from business risk, and separating business assets from personal liabilities.

Again, “risk” may take many forms but most commonly we mean the risk of being sued. It also means protecting personal assets from claims in a marriage breakdown.

Once the relevant issues have been considered and understood, steps are taken to:

  • quarantine business owners from business risk;
  • quarantine business assets from personal liabilities;
  • quarantine business assets from business risk;
  • quarantine the risk of one business from the risk of another business; and/or
  • reduce assets held by at-risk individuals.

Basic principles:

  • The trustee of a trust is personally liable for all of the debts of the trust. The trustee has a right of indemnity against trust assets; however, where trust assets are insufficient to pay a claim, the trustee will be responsible for the payment of the claim.
  • Discretionary beneficiaries do not generally have any interest in trust assets. Accordingly, creditors or trustees in bankruptcy cannot access trust assets where an individual discretionary beneficiary has a personal liability. A discretionary beneficiary’s unpaid trust entitlement is, however, considered to be an asset of the beneficiary and a demand for payment can be made by a trustee in bankruptcy.
  • Generally, shareholders of companies have no liability to the creditors of the company for company debts.
  • Generally, unit holders of unit trusts have no liability to the creditors of the trust for trust debts.
  • The directors of a company do not incur personal liability for the debts of the company except in limited circumstances (e.g. insolvent trading, directors’ guarantees).
  • A trustee in bankruptcy or company liquidator can claw back property where assets have been dealt with prior to bankruptcy or liquidation with the intention of placing assets beyond the reach of creditors.
  • Usually a person’s superannuation balance is protected from a trustee in bankruptcy except where assets have been placed into a super fund or contributions made with the intention of placing assets beyond the reach of creditors.

Structuring assets for maximum protection

The process involved in quarantining assets from risk will, in most cases, lead to a structural outcome based on a three-step approach:

Determining the best structure requires consideration of relevant factors, including:

  • The client’s business plan or investment strategy;
  • Type of business or investment and associated risks;
  • The lifespan of the business or investment;
  • The types of assets to be acquired by the business;
  • Taxation – tax rates, tax planning opportunities, carry forward losses, PSI regime etc;
  • Governance issues;
  • Potential liabilities;
  • Establishment and administrative burdens;
  • Working capital and funding requirements;
  • The introduction of new investors and the exit strategy;
  • Business succession and governance;
  • The identity of at-risk persons; and
  • The identity of the owners of personal assets.

The toolbox





Binding Financial Agreement

Governance Agreements

Buy/sell Agreements

Trust Checklists

Structuring a trust for asset protection

When setting up a new trust, some thought needs to be given to who will hold the various controlling positions in the trust (e.g. the trustee and the appointor). We need to consider if the way we set up a new trust provides asset protection for the trust and/or personal assets.

There is no one size fits all method for doing this. Most accounting professionals have a preferred model for the positions in a new trust; however, this should only be used as a starting point before considering what effect a client’s specific circumstances may have on that model.

In order to achieve effective asset protection using a trust, the overriding principle is to separate risk from assets. The trust should not be established in such a way that any “at-risk” person has sole control of trust assets. Some commentators suggest that such a person should have no direct control of trust assets at all following recent court decisions (e.g. Richstar). The courts consider that, where the trustee of the trust is the “alter ego” of the “person at-risk”, then the assets of the trust may be treated as that person’s assets. For that reason, it is critical that, when structuring and administering any discretionary trust, the roles of the trustee (and directors and shareholders of corporate trustees), appointor and beneficiaries are carefully considered. Where an existing trust does not possess the recommended characteristics, it may be necessary/desirable to amend the trust deed to achieve this.

Some consideration also needs to be taken of the effect of the Family Court’s jurisdiction on the issue of asset protection. The Family Court has extremely broad powers to make orders regarding the distribution of assets in marital matters. In some cases, the Family Court may disregard a trust and make orders that trust assets be transferred to specific parties in a marital dispute. Even where trust assets are not considered by the court to be marital assets, the court may still rule that a trust asset is a financial resource of one party and determine financial contributions based on that assessment.

The Trustee

Ideally, the trustee should be a company. Because trusts are not considered to be legal entities, when trusts operate there must be a person or other legal entity that becomes primarily liable for the debts of the trust and who can act on behalf of the trust. This is the trustee. Trustees incur personal liability for the debts of the trust. The trustee is entitled to be indemnified for any personal liability by recouping any such amount out of the assets of the trust. If the trust does not, however, have sufficient assets to pay that liability for the trustee, the trustee is personally responsible for the payment of the trust’s debts. The trustee is responsible for those liabilities, regardless of whether the trust has sufficient assets. Any trustee who cannot claim against the indemnity has his or her personal assets exposed to the claims of creditors of the trust.

A number of recent cases (e.g. Richstar referred to above) have highlighted the need for separation of the “at-risk” person in a trust situation from trust assets. The use of a sole purpose company as the trustee of a trust can provide a greater level of asset protection than the appointment of an individual as trustee, because doing so separates risk from assets.

Most trust deeds also prohibit certain individuals from being trustees. For example, the settlor is commonly excluded. Some trusts also prohibit a beneficiary from being a trustee. In addition, some jurisdictions (for example, NSW) impose stamp duty on a transfer of assets from one trustee to another when the trustee is changed. Using a corporate trustee will usually avoid these problems.

The trust deed must also contain effective provisions for the appointment and/or removal of trustees. Asset protection may be adversely affected where the trust deed does not contain an effective mechanism for the replacement of trustees. It may lose flexibility and may make it difficult or impossible to change the trustee. For example, where a company acting as a trustee has a liquidator appointed, the liquidator may gain control of trust assets. Adequate provisions for the removal of the company as trustee and a new appointment become critical, so that a new trustee can be appointed before the liquidator can take control of trust assets.

The Appointor

The Appointor (sometimes called the Principal) is the person who controls the appointment of trustees. Again, the trust should not be established in such a way that any “at-risk” person has sole control of trust assets. This also extends to the Appointor since that position is a critical control point. Careful thought needs to be put into who might (or might not) be appropriate in this role. This is very much a balancing act because the person who wants to control the trust may be an “at-risk” person. So a balance needs to be struck between control and risk.

Once again, the trust deed must contain effective provisions for the appointment and/or removal of the Appointor. Asset protection may also be adversely affected where the trust deed does not contain such an effective mechanism. The trust deed may lose flexibility and may make it difficult or impossible to change the Appointor. For example, where the Appointor becomes bankrupt, the trustee in bankruptcy may seek to exercise the powers of the Appointor and to appoint a new trustee who will take direction from the trustee in bankruptcy. This would allow the trustee in bankruptcy to gain control of trust assets. Adequate provisions for the removal of the Appointor and a new appointment become critical so that a new Appointor can be appointed before the trustee in bankruptcy can take control of trust assets. Alternatively, some trust deeds provide for the automatic appointment of an “alternative appointor” on the occurrence of events like bankruptcy.

A Real World Story

The case study: The Aptons and Steel Gritz

Now let’s take you into the world of Mr & Mrs Apton, and their manufacturing business, Steel Gritz. Like many other small business owners, the Aptons face risks on a number of fronts, and they have several options to consider in mitigating the risks and maximising the protection of their hard won assets.

Part 1 – Third party injury

Part 2 – Massive damages

Part 3 – IP Exposed

Part 4 – The bank calls in its loan

Part 5 – Unpaid trust entitlements

Part 6 – Mr Apton gives guarantees

Part 7 – Super fund issues

Part 8 – Exposing assets to claims

Part 9 – Personal issues arise



Difficult to change direction once you’ve mapped your course

Changing the direction of any legal structure can be difficult, and there are significant downsides in trying to adopt a new view of the landscape to maximise asset protection. Sometimes it may simply be too late, in which case restructuring should only be attempted:

  1. Before any threats become imminent – it is usually too late to undertake restructuring at that point because of the “claw back” and “commencement” provisions in bankruptcy and insolvency legislation;
  2. Before a sale of significant parts of the business and before any term sheet or memorandum of understanding are prepared or signed. Restructuring at this point, particularly where there is a tax benefit (e.g. satisfying the MNAV test), will inevitably lead to a Part IVA action on the part of the ATO; and
  3. Before significant value has accrued in the assets to be restructured. Where a CGT rollover is unavailable, the CGT and stamp duty costs can be prohibitive.

Rather than attempting to regroup around protection of assets once you’re already in Mr and Mrs Apton’s position, a holistic approach to protection and structuring dictates that a true understanding of a client’s circumstances is paramount. The accountant is in a prime position to achieve this by:

  • Having continuing and open conversations with clients about their affairs;
  • Anticipating developments based on information available in their accounts and obtained through those conversations;
  • Regularly stress testing the client’s structures to identify areas of weakness and taking steps to shore up those weak points; and
  • Speaking to clients about personal guarantees and the other sources of personal liability.

By viewing the client’s circumstances in this light, it is then possible to identify the risks they face and implement the correct structures or restructures to address those risks and quarantine the assets they have worked so hard to build.

The effectiveness of asset protection may be impacted if structural elements are not properly sourced i.e. use reputable professionals who provide proper oversight/review and be wary of the risks of using document templates or automatic systems. Simple errors at inception can end up being disastrous and deplete any planned asset protection.

Robert Krigsman - Principal, Krigsman Partners
Troy Morgan - Partner, Enterprise, KPMG Australia