When gifting an asset, most people don’t properly consider the steps they can take to protect that gift from falling into the hands of an unintended recipient.
In most cases, it is far easier and more cost effective for the donor to put asset protections in place at the time of giving the gift than it is for the donee to do so after the fact.
The two most common scenarios in which a donee can lose the gift are:
- where the gift is lost to creditors, such as in a bankruptcy or civil judgement enforcement action; or
- the gift becomes the subject of Family Court proceedings.
In most scenarios, an adequate protection that can be offered is for the gift to be held by someone other than the intended recipient. This can be achieved by the gift being held on trust for the benefit of the recipient, or for the gift to be owned by a corporate entity.
Although these strategies will usually protect a gift from being taken by creditors in a bankruptcy or civil judgement enforcement action, they may not offer the same level of protection in a Family Court proceeding.
The Family Court is conferred wide ranging powers by the Family Law Act 1975 (Cth) and the Family Court Act 1997 (WA) which allow it to treat assets held by a trust or a corporate structure as assets constructively controlled or beneficially owned by a person.
While the Family Court may not be able to make orders binding the trustee or the corporate entity that holds the asset, it can credit the value of the asset to the intended recipient for the purpose of determining how much they are to receive (or give) at final settlement.
So how can you protect a gift that may become the subject of a Family Court proceeding?
By charging it. And no, this solution doesn’t refer to batteries, but rather to registering a security interest over the gift.
An example that most are familiar with is a mortgage. If you were to gift a house to someone, be it a family member, friend, relative or a complete stranger, you can protect that asset from being lost to others by registering a mortgage over it.
You can call upon the mortgage if someone else ever tries to take the house from them. For example, when a Family Court proceeding is commenced and the house becomes the subject of that proceeding, you can simply call upon the mortgage and allow the gift recipient to treat the house as a liability, rather than an asset.
Depending on the other assets subject of the proceedings, calling upon the mortgage may defeat the Family Court proceedings entirely, or ensure that the gift is returned to you if it can no longer be utilised by the intended recipient.
For non-real estate assets, you can simply execute a deed with the gift recipient that grants you a Personal Property Securities Act security interest over the asset. Again, you may never intend to call upon the security interest, but you will have the option to do so if it ever becomes necessary.
If you want to give those close to you the gift of asset protection this Christmas, speak to one of our lawyers about what you can do to make sure your gifts are enjoyed by those you want to receive them.