Lawyers and accountants are regularly asked to advise clients about the steps they should take to shield their assets from the risks of financial failure. Many asset planning structures have limitations. There are no guarantees that any one particular type of structure will provide the desired protection.
Through a series of articles, we will examine common asset planning structures, and consider how effective they are from attack by bankruptcy trustees and liquidators.
Who needs asset planning?
Asset planning should be considered by any individual who:
- is a company director
- is in business as a sole trader or through a partnership
- provides professional advice or services, such as accountants, lawyers and doctors
- engages in activities involving possible personal financial risk, such as providing guarantees for others debts
The following are some examples of typical asset planning arrangements. Later we will consider how these arrangements might be viewed by a bankruptcy trustee in an insolvency scenario.
Example 1: Transfer between spouses
- A husband and wife jointly own their home, are joint borrowers on the mortgage and each contribute to mortgage repayments and household expenses.
- The husband wants to start a business but needs a bank loan. The bank requires him to personally guarantee a bank overdraft.
- On the advice of the family accountant, the husband transfers his interest in the family home to his wife for ‘natural love and affection’. This is, in effect, a gift.
- The accountant tells his clients that as the home is solely in the wife’s name, it is protected if the business fails and the husband goes bankrupt.
Is the accountant correct? As we will see below, the answer depends on a number of factors.
Bankruptcy – Clawback Provisions
If the husband was to go bankrupt, his bankruptcy trustee has the power to set aside certain pre-bankruptcy transactions depending on when they were entered into. The table below summarises the periods of time prior to bankruptcy during which certain transactions may be at risk.
|Period prior to commencement of bankruptcy||Type of transaction by a person who later becomes bankrupt|
|2 years||A transfer of property to an unrelated party for less than market value.|
|4 years||A transfer of property to a related party for less than market value|
|5 years||A transfer of property to a related party for less than market value, if the transferor was insolvent in the fifth year prior to bankruptcy.|
|Any time||A transfer of property done with the intention of defeating creditors.|
In our example, had the husband transferred the home to his wife three years prior to bankruptcy, the transfer would be void. The bankruptcy trustee could sue the wife and require her to transfer a half interest in the home to the trustee. The wife would have no defence.
Example 2: Assets owned by spouse
In our first example, we considered an asset owned by both spouses which was subsequently transferred to one of them. Another common arrangement in a matrimonial context is for any assets to be ‘purchased’ by only one of the spouses, usually the one who is less likely to face risk at some future time.
In this scenario, both spouses will jointly decide which property to purchase. Both will make financial and non-financial contributions to the purchase. In the case of the primary residence, both spouses will reside in it as their matrimonial home.
Is this structure safe if the spouse who does not own the property subsequently goes bankrupt?
Bankruptcy – Matrimonial Assets
Whilst having any assets owned by the ‘not at risk spouse’ provides some measure of protection, it is certainly not guaranteed that a bankruptcy trustee may not seek to make a claim to those assets.
In a matrimonial context, where spouses purchase a matrimonial home, with each making contributions to the purchase price, but the property is only registered in the name of one of them, there is an inference that they intended to jointly own the property, irrespective of how much each of them contributed to the purchase price. This is known as the ‘inference of joint ownership’ and it can be rebutted by evidence of the actual intention of the parties at the time of purchase.
In a bankruptcy context, it allows a bankruptcy trustee to lay claim to an interest in property registered only in the non-bankrupt spouse’s name.
The ‘inference of joint ownership’ could also apply to the parties to any committed relationship, including de facto and same-sex relationships. It may include any property purchased in the course of the relationship, not simply the ‘matrimonial home’.
In relation to our example above, the trustee for the bankrupt spouse will claim that the matrimonial home is a joint asset of the marriage and that the bankruptcy trustee is entitled to a half share of this asset.