I was flying home from out west a couple of weeks ago when the gentleman next to me started a conversation. I learned in the course of our chat that he is truly terrified of flying. Yet, he shouldn’t be worrying about his own physical protection nearly as much as his asset protection given the probabilities something will go wrong.
What can be done to protect assets from the attacks of others? I started the topic of asset protection last week. Today, I want to share some final ideas.
1. Properly structure loans. If you’re going to lend money to a family member, consider securing the debt with assets that may be acquired by your family members. For example, if you lend money to a child to help purchase a home consider taking back a mortgage on the property. This will give you a claim on the property in the event your child suffers a marriage breakdown or some other attack on his assets. Finally, you can forgive a loan owing to you at the time of your death without any negative tax consequences for anyone.
2. Make gifts properly. If you’re about to accept a position as a director, guarantee debts or sign certain agreements, you may expose yourself to potential liability. Making a gift of assets prior to these events could protect those assets. Now, be careful if you make a gift of assets at a time when you owe tax to the Canada Revenue Agency. Our tax law can cause the recipient of the gift to become liable for your tax bill to the extent he didn’t pay fair market value for the assets received. Finally, making a gift of assets is considered to be a disposition of those assets at fair market value (unless it’s a gift to your spouse), so count the tax cost first.
3. Structure partnership interests. If you’re going to be a partner, you’d be wise to set up a limited liability partnership where you are a “limited partner,” who is protected from liability that might be associated with the actions of other partners. A “general partner” is subject to unlimited liability, which is best to avoid. If you’re assuming the role of a general partner, consider using a corporation owned by you to act as that partner to insulate you from potential liability.
4. Limit personal guarantees. Guaranteeing the debts of others should be avoided if possible since the rights and claims of creditors against the borrower can be enforced against you. In the event that you make a personal guarantee of corporate debt, it may be possible to claim tax relief in the form of an allowable business investment loss if you have to make good on paying that debt for the corporation.
5. Minimize directorships. Don’t accept a position as a director lightly. Although directors are not generally liable for the debts of a corporation unless they have either given a personal guarantee, or have acted in bad faith, they can be liable for source deductions and non-resident withholding taxes, goods and services taxes , harmonized sales taxes , certain wages of employees and provincial sales taxes.
6. Consider liability insurance. In addition to home, auto, boat and similar personal insurance, director’s liability insurance should be considered if you’re a director of a corporation, foundation or other charity. You should also consider an umbrella policy, which can protect your assets above and beyond the standard limits that can be found on your primary home, auto or similar policies.
7. Enter a domestic contract. Okay, so this isn’t romantic, but creating a marriage contract or co-habitation agreement can help to protect assets from a breakdown in those relationships.
8. Make use of registered plans. Federal bankruptcy laws were amended in 2008 to ensure that registered retirement savings plans and registered retirement income funds are protected from the claims of creditors, with the exception of contributions made within 12 months of the date of bankruptcy. Further, insurance-type RRSPs and RRIFs continue to offer a measure of creditor protection.
Finally, get professional help when taking steps to protect assets. Some legislation could thwart your plans.