A Practical Guide to Protecting Family Wealth 

Building family wealth often takes years of dedication, hard work, and personal sacrifice. However, it can be quickly eroded by various threats, including legal challenges, regulatory issues, and economic factors. For instance, even a modest estate can be subjected to costly litigation, with fees potentially exceeding hundreds of thousands of dollars. Business owners, professionals, and even everyday individuals face risks that can risk the wealth they’ve worked hard to gather. Fortunately, with proactive measures, you can protect your assets and secure your family’s future. 

Is Your Family Wealth Protected? 

There are five significant threats to family wealth, each posing a unique risk to financial security and stability. Recognizing these threats is the first step toward creating a lasting protection plan. 

#1 Litigation 

In today’s legal environment, virtually anyone can initiate a lawsuit against you – from employees and clients to neighbors and regulatory bodies. With a booming legal industry, litigation is big business in Australia, which generates over $23 billion annually in legal revenue. “No Win, No Fee” lawyers have made litigation more accessible, further increasing the risks. Assets held in your name can be directly targeted in legal actions, and the time, stress, and expenses associated with litigation can add up quickly. 

#2 Incapacity 

In the event of mental or physical incapacity, key individuals may lose their ability to manage assets, act as trustees, or make crucial decisions. This risk can severely disrupt a business, trust, or family investment. Without a strategic plan in place, incapacity can lead to uncertainty and jeopardize the family’s wealth. 

#3 Bankruptcy 

Economic instability, especially following events like COVID-19, can lead to financial strain and potential bankruptcy for business owners and professionals. Bankruptcy impacts all personal assets, including businesses, trusts, and superannuation funds, making it essential to have a protective plan for these assets in times of financial crisis. 

#4 Death 

Upon death, most people assume their assets will be distributed according to their will. However, Australian law allows for family provision claims, which permit disaffected parties to challenge a will. Such challenges can result in lengthy, costly legal disputes and even override your original estate intentions. For example, a case in Western Australia saw legal fees of $500,000 incurred to contest a $600,000 estate, illustrating the potential financial toll of estate challenges. 

#5 Family Law 

Family law also poses a risk to family wealth, especially in cases of relationship breakdowns. In Australia, a two-year de facto relationship grants each partner recourse over the other’s property, which can be problematic in cases of divorce or separation. Similarly, inheritances, gifts, or unpaid entitlements within family trusts may be split in court proceedings. Even traditional asset protection strategies, like transferring assets to a spouse, may fail if that relationship ends. 

The Solution: The Protector 

The Protector, developed by asset protection and estate planning experts Abbott & Mourly, offers a robust solution to secure family wealth against these five major threats. Available through LightYear Docs, The Protector enables families to safeguard their assets and ensure they remain within the desired family lineage. 

#1 Establishing a Family Protection Trust 

The Protector utilizes a specially structured trust designed for family protection. A Family Protection Trust not only safeguards assets but also ensures their transfer along the family line. In this trust, the Family Protection Appointor (FPA) holds a key role in controlling beneficiary designations and trustee appointments, building a chain of succession that preserves family wealth across generations. 

A corporate trustee structure can also enhance the longevity of the trust, as it allows for smoother transitions in case of a change in trusteeship. By entrusting assets to a corporate trustee, families can avoid common issues with personal trustees, including legal liabilities, incapacity, or untimely death. 

#2 Calculating Family Wealth 

To protect assets effectively, it’s essential to understand the family’s net wealth. In Australia, there are tax benefits for certain assets held in personal names, like a primary residence (no capital gains tax) or negatively geared properties (tax deductions on interest). However, personal assets remain exposed to potential risks. When feasible, transferring assets to a Family Protection Trust provides a higher level of protection, provided there are no associated capital gains or stamp duty implications. 

When direct transfers aren’t advisable due to tax consequences, another option is to transfer only the underlying value of the assets to the trust. This method protects the family wealth without triggering additional taxes or stamp duties. 

#3 Gifting Net Wealth to the Family Protection Trust 

Once the total net wealth is determined, it can be transferred to the Family Protection Trust. Instead of transferring the assets themselves, the wealth value is “gifted” using a promissory note, effectively reducing the individual’s personal wealth to a minimal level. This approach keeps the assets under the control of the original owner while ensuring the equity is safeguarded within the trust. 

#4 Loaning Back to Asset Owners 

The Family Protection Trust can then lend the equivalent of the net equity back to the asset owners, similar to a bank loan. This arrangement allows the original owner to continue using the assets while legally securing them under the trust. Just as with a mortgage, the asset owners must “service” this loan from the trust to maintain usage rights. 

#5 Securing the Loan 

To secure these loans, the Family Protection Trust can register a mortgage over any real estate. When there is an existing bank mortgage, the trust can secure a second mortgage to further protect the assets. Additionally, assets like vehicles, jewelry, and collectibles can be secured through the Personal Property Securities Register. 

#6 Utilizing a Call Option 

Over time, assets may appreciate, leading to an increased equity value. Instead of repeatedly gifting increased values to the trust, a call option agreement can be established between the owner and the trustee. This option allows the trust to purchase assets at their current market value, ensuring that any future appreciation benefits the trust and not the individual, which helps in maintaining asset protection. 

What’s Next? 

The Protector is a comprehensive solution designed to shield family wealth from the five major threats. Implementing The Protector now can make a profound difference in securing your family’s assets for future generations. Whether it’s for your family home, business, or investments, having a Family Wealth Protection strategy in place is invaluable in safeguarding your legacy.