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.

Disclaimer: 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. 

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. A typical family trust operates as a legal relationship between a trustee and beneficiaries, where 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 only hold an interest in the trust property. Therefore, if a beneficiary were to experience financial hardship, trust assets are protected from the beneficiary’s creditors as they do not own the trust property.

However, trustees on the other hand may fail to achieve asset protection if the predominate purpose for the administration of a trust was for a tax benefit or other considerations. For example, it is common for family trusts to have a corporate trustee as this structure brings tax benefits and can exist indefinitely and can appoint multiple directors to control the trust.

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 with relevant clauses included to ensure asset protection.

Protecting Business Assets

One of the greatest risks during economic downturns is for a business to become bankrupt. Creating limited liability companies or corporations is the most common strategy to help protect your personal assets from the reach of creditors. 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 arise 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 can 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 a series of rash decisions could lead to a loss in the potential future value. 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 law@etheringtons.com.au.