ARE YOUR ASSETS PROTECTED?

Many structures we have seen at Irish Bentley are vulnerable to attack, especially given the Federal Court decision described below.

The decision made it easier to pierce trust structures used to protect assets, and set out some important rules to follow.
Accordingly, anyone seeking to protect their assets, should ensure their structure is consistent with the principles set out by His Honour Justice French. French in the ASIC matter, Richstar Enterprises Pty Ltd v Carey (No 6) [2006] FCA 814 (Richstar). The case has far reaching implications on the security and protection of assets held in a trust.

At the end of the day:

If you do not have any asset protection, then you should seek legal advice on what you can do – the number one rule is: the sooner the better.
If you do have asset protection, then you should seek advice on whether it is effective protection –having regard to cases like the below Richstar case.

Irish Bentley Lawyers have been helping their clients to protect their assets for decades, and a number of our lawyers have completed specialist courses in insolvency provided by ARITA.

Richstar Case

Excuse us for being legalistic in the below summary of the decision.
Basically a request by ASIC was lodged for the purposes of appointing a receiver over assets held in the defendants discretionary family trusts. The court has the ability to extend the orders of a receiver so as to allow access to assets held under Trust. French J accepted the argument by ASIC that the defendants had a ‘contingent interest’ in the discretionary trusts, as, in all practical terms they ‘controlled’ the trust. The implications of extending the receivers orders in this regard, in effect deems the assets held under the trust to be defined as property under Section 9 of the Corporations Act. His Honour described three scenarios in which he would be willing to consider extending the receivers orders so as to cover “expectant interests” in a trust.

A trust in which the defendant is:
1. a beneficiary;
2. a director; and
3. a secretary of the corporate trustee;
and the trust confers a discretion to distribute to targeted beneficiaries to the exclusion of others (a discretionary trust).
A trust in which the defendant is:
1. a trustee; and
2. a beneficiary;
where the defendant has a discretion to distribute at least 39% of income or capital to a targeted beneficiary.
A trust in which the defendant is:
1. a beneficiary;
and the defendant has the power to remove or appoint trustees (e.g. a principal or guardian).

It is clear that the protection previously offered by trusts is significantly weakened as a result of this decision. It is evident that the principles established in this case will seek to pierce the corporate veil and the protection previously enjoyed by company directors in regards to same.

Whilst the decision handed down by His Honour provided a narrow interpretation in the Supreme Court of New South Wales in Smith Public Trustee v Smith [2008] NSWSC 397 it currently remains as authority should judges in future court decisions choose to follow it.

Regardless of any future courts application of the Richstar case, alternative asset protection strategies must be implemented if practitioners are to provide their clients with any real prospects of asset protection.

Offshore Asset Protection

In order to adequately protect clients assets the author invites practitioners to seriously consider the advantages and security which offshore asset protection can provide. It is important to note that there is no illegality in using the laws of another jurisdiction to secure a client’s financial position and protect their assets.

Definition of “Offshore”: When astute investors discuss going ‘offshore’ in regards to asset protection this generally refers to utilising a jurisdiction other than that of your current location (e.g. outside your own country) as that jurisdiction may be better suited for protecting your assets. Going offshore simply involves finding a different legitimate avenue to do business and obtain protection while doing so.

Implications of “going offshore”: When people “go offshore”, governments are often unable to track their earnings or lay claims over their assets. By going offshore you can shield income, profits and other capital from any unwanted interference whilst protecting your privacy.

Main benefits of going offshore

Asset Protection – By transferring the domicile of your assets (not necessarily yourself) those assets are protected against any claim from your creditors as they have no power to act in a different jurisdiction.
Asset Security – By securing your assets in a jurisdiction where privacy laws are tantamount and the laws of a “foreign country” are not recognised, your personal information remains secure.
Privacy – By trading and banking in a different jurisdiction with powerful and enforceable privacy laws your personal information remains secure (particularly important in relation to your financial and banking structuring). In most developed countries laws are in place to enforce the release of personal account information but in the correct offshore jurisdiction laws are in place to protect this information from being released.
Tax Minimisation – By earning income offshore through a separate entity the taxable income your client earns in their country of residence is reduced. By correctly structuring an offshore business, in the right jurisdiction, your clients can and will legitimately and legally reduce their tax liability.
Access World Markets – By setting up your clients business and financial facilities in the appropriate offshore jurisdiction, your client will be able to access worldwide markets and reap substantially higher returns that may not necessarily have been available to them domestically, and does so with much greater privacy.

Added benefits:

To avoid the prying eyes of bureaucrats;
To avoid a punitive taxation levy;
Simplifies business operations;
Does not require a tonne of paper work / forms to be filled out; and
Does not require scrupulous accounting.

Hiding your assets is not at all illegal; it is not a crime to go offshore to ensure that nobody can take any assets or funds which you earned legitimately.

Eligibility for ‘going offshore’

Almost everybody can enjoy the benefits of going offshore, be it as simple as opening a bank account overseas, or operating an internet business using an overseas domiciled company attached to an overseas bank account or fully operating a business enterprise offshore. An International Business Corporation (IBC), a Foundation or a simple Offshore Trust can own your clients intellectual property, enter into lease or hire agreements with your clients or lend money at interest and take security.

You do not have to live offshore in order to take advantage of the worldwide marketplace or the protection and simplicity offered by legitimately structuring your business affairs in a jurisdiction outside of the one that you live in.
You do not have to live offshore to enjoy the benefits, security and privacy inherent in the ownership of a bank account in a country outside your country of domicile in the name of an international business corporation over which you have the ultimate control.

How to go ‘offshore’

It is recommended that when planning to go offshore that you engage a partitioner confident in conducting offshore operations as this will assist in clarifying any confusion as to the offshore jurisdiction and ensure that relevant documentation is compliant with the offshore jurisdiction. It is important to ensure that all advices provided to a client before taking business offshore is well researched and current. Having a comprehensive knowledge of the offshore jurisdiction and the benefits as well as the negatives which may attach to same are important from the get go. Any failure to research comprehensively in the early stages can prove to be very expensive to a client (e.g. domiciling a structure in the wrong jurisdiction can be both expensive and inconvenient). Choosing the right bank is vitally important.

Proper advice needs to be provided to your client as to the strength and resilience of the proposed countries privacy laws and what agreements (treaties) it might have with other countries, particularly Australia.

Going offshore is not difficult to do however it requires an expert or professional to do so in order to avoid the pitfalls, expensive mistakes and time delays, which can come with the new territory. Going offshore is not a short term experience and as such will require a great deal of initial research and ongoing research into the proposed companies laws and any amendments that may be made which might effect the asset protection of your client.

Summary

The decision and issues described above highlight the importance of getting your asset protection structures correct.
At the end of the day:

If you do not have any asset protection, then you should seek legal advice on what you can do – the number one rule is: the sooner the better.
If you do have asset protection, then you should seek advice on whether it is effective protection –having regard to cases like the below Richstar case.