Some old fashioned protection for the family home
The family home is often your most significant asset – both in terms of monetary and emotional value, and as such, should be at the forefront of any asset protection strategy.
There are various methods adopted that can offer some form of protection, and while none are 100% effective in all circumstances, there is one method that stands above the others in terms of simplicity and popularity, placing ownership of the family home solely with the non-risk partner.
Who needs asset protection?
Your assets are at risk to people or organisations that you owe money to – your creditors. If you are in business, you not only have to consider your personal creditors but also those of your business, and any statutory obligations arising from your role as a director and/or employer. Potential creditors include lenders, suppliers, the trustee in bankruptcy and the ATO to name a few.
Is this strategy effective?
On the face of it, removing legal ownership of the asset from the risk exposed partner should be effective (or better yet no interest in such asset ever being owned by such partner). However, the law intervenes to make this strategy less available to those who might seek to use it for the improper purpose of evading your creditors. We will not cover the voidable transaction provisions under the Bankruptcy Act in this article but focus on the presumption of resulting trust.
Under the presumption of resulting trust, a party can be treated as a beneficial owner of property under the law of equity, notwithstanding their lack of legal ownership. The presumption generally arises where a person contributes purchase money to a property but does not seek to be registered on title as an owner, or where a person transfers a property or part of a property to another for no payment.
Where a resulting trust can be demonstrated, the creditors of the at-risk party may be able to lay claim to an interest in the family home – even if the home is solely in the name of the other partner.
Can the presumption of resulting trust be avoided?
SOMETIMES - The old law of equity recognised that there were some circumstances where a person might honestly wish to advance the prospects of another for nothing in return. This recognition called the presumption of advancement. In a recent case, the Federal Court has held that the presumption of advancement remains good law in Australia and can apply to the family home.
So, when a creditor raises an argument of resulting trust and is seeking access to the otherwise protected family home, the presumption of advancement may be used as a shield to thwart such access.
When does the presumption of advancement arise?
Unfortunately, the application of this presumption is quite narrow and based on a traditional view of the type of relationships where one person may desire to give a significant benefit to another for nothing in return other than the love and affection of the recipient.
- The law only recognises that a man may wish to advance his wife and that a parent may advance their child.
- De facto or same sex couples are not eligible, although engaged hetero-sexual couples are recognised.
- The advancement is also only one way – a wife cannot be presumed to have a wish to advance her husband, nor children presumed to wish to advance their parents.
- Gifts to adult children also do not count – the relationship must be one where the gift giver satisfies the description of in loco parentis.
How can I take advantage of the presumption of advancement in my own asset protection strategy?
If you are in one of the eligible relationships and seek to protect your home by transferring it to the non-risk partner, there are two main steps you can take to minimise future creditors’ ability to claim a resulting trust, and maximise your prospects of maintaining an argument of lawful advancement.
- Structure your affairs as early as possible, preferably well before undertaking any commercially risky activities.
- Ensure the purpose of any property acquisitions or transfers are well documented and clearly state that actions are being taken to advance the situation of your loved one.
In documenting the above, you must be mindful that while structuring your personal affairs prudently to manage risk is lawful, deliberately structuring your affairs to defeat the claims of legitimate creditors is not – even in relation to future and as yet unknown creditors.
This is a fine line that an experienced commercial lawyer can help you safely navigate.