Disclaimer: The directives in this article relating to the COVID-19 pandemic may no longer be in force. Please use caution if you are citing legislative material from this article as laws are subject to change. We recommend that you seek the most up-to-date law.

This article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, financial advice. We recommend that you should consult your own finance advisors before engaging in any transactions.

The COVID-19 pandemic has shocked the financial markets and created difficult situations for people who own assets that have fallen in value. In this article, we explore three tips that could help protect your assets and finances throughout the COVID-19 crisis, or other financial difficulties.

Protecting Personal and Family Assets

A discretionary trust (also known as a family trust) can be used to protect assets in the event of a financial crisis or bankruptcy. In a typical family trust, the trustee is under an obligation to hold property for the benefit of the beneficiaries. The trustee is the legal owner of the trust property and the beneficiaries hold an interest in the property. Therefore, if a beneficiary experiences financial hardship, trust assets are protected from the any creditors, as the beneficiary does not own the trust property.

It is common for family trusts to have a corporate trustee as this allows for particular tax benefits. It also means the trust can exist indefinitely, as there may be multiple directors appointed to control the trust.

However, there are many events that risk exposing the assets of a trust, including where loans are made from a family trust, when there are unpaid allocations of trust income and capital, and when companies are beneficiaries. Many deficiencies stem from a poorly constructed trust deed, therefore it is important to consult a legal professional to carefully draft a deed to ensure asset protection.

Protecting Business Assets

One of the greatest risks during economic downturns is that a business may become bankrupt, leaving both employees and directors vulnerable. Creating limited liability companies or corporations is the most common strategy to help protect your personal assets from the reach of creditors if your business becomes bankrupt. Businesses can also use the structure of a trust to protect assets that have value, such as machinery, equipment or intellectual property, to prevent them from being taken in the event of a lawsuit.

Professionals that are at risk of personal liability must be careful as the risk of insolvency and/or lawsuits frequently arises during a financial crisis. Thus, it is important to check your business and professional indemnity policies for inclusions and exclusions. One way you could protect yourself is to increase your professional and public liability policy premiums and cover more extensively the events that are likely to occur in the current environment.

Pension and Superannuation Funds

Most pension and superannuation funds allow you to shift your investments across different asset classes. As volatile market movements have resulted in falling share prices, shifting your investments could substantially reduce the current value of your portfolio. If you are older or rely on income from your fund, you could consider reducing the risk of your investments by shifting holdings from equities to bonds and cash. However, it is important to note that moving your investments could mean that you sell at a lower than usual price and therefore miss out on opportunities for future price increases. As such, some financial advisors may suggest to sit out of the market and wait until things blow over. If you are middle-aged or younger and will not need to rely on a fund income within the next ten years, attempting to time the markets is risky and rash decisions could lead to a loss in the potential future value of your assets. Many suggest that the key is to maintain a balanced portfolio that spreads risk across different asset classes to reduce your downside risk and also ensure exposure to upside risk when the market outlook improves.

Further Information 

If you would like more information on how we can advise you about trusts and protecting your assets, do not hesitate to contact us on 9963 9800 or at [email protected].