Asset Protection Strategy – Gift & Loan Back

Asset protection strategies for our clients are a very big issue. At Paris Financial we lead the way in structuring our clients for asset protection and tax effectiveness. Many business owners and high wealth clients benefit from the structures we put in place for them, providing protection for their assets and ensuring substantial tax savings over the long term.

John Ioannou of McCullough Robertson Lawyers has written a great article on “Gift & Loan Back” asset protection strategies. Please contact me direct on #03 8393 1020 and speak with me if you wish to discuss asset protection strategies.

Pat Mannix, Partner, Paris Financial

Gift & Loan Back

Risk is an inherent feature of being in business. When we look at measures to minimise exposure to that risk, a useful starting point is to ensure that ‘at risk’ individuals or entities do not hold valuable assets. Where they do, the goal is to transfer those assets to a lower risk entity.

Sounds easy enough doesn’t it?

But, what if transferring those assets will trigger capital gains tax or stamp duty?

How do you balance the advantages of improved asset protection against the tax costs of transferring an asset?

Are you effectively asking your clients to invest in an expensive insurance policy?

The good news is there are asset protection strategies that don’t trigger tax or duty liabilities.

Let’s look at one.

Gift & Loan Back

An excellent example of a tax-effective asset protection strategy is a ‘gift and loan back’.

The strategy, in its simplest form, involves transferring the value of an asset from a high risk environment to a low risk environment. This can occur without transferring the legal ownership of the asset itself, meaning that there will usually be no income tax or stamp duty implications.

The broad steps are as follows:

  • the owner of a valuable asset agrees to gift the value, or net value, of an asset to a low risk passive entity (e.g. a special-purpose protective trust)
  • the passive entity agrees to loan that value back to the owner, and
  • the passive entity takes security for repayment of the loan over the owner’s asset (e.g. mortgage, security interest).

By acquiring security for repayment of the loan, the passive entity should be entitled to enforce a priority over future unsecured creditors, thus protecting the value of the asset. Insolvency clawbacks must also be considered in this strategy.

Let’s look at an example.

Assume that Anne holds 100% of an investment property.

The current value of the home is $1,500,000, although there is an existing mortgage of $500,000.

Anne’s equity in the property is $1,000,000.

By carrying out the gift and loan back strategy, the Campbell Family Trust has become a secured creditor in respect of the $1,000,000 equity in the property.

No requirement for cash

Given that this strategy is often an internal arrangement, there may be insufficient cash to fund the gift and loan back.

It is possible to instead arrange for the parties to use a form of non-cash consideration (e.g. a negotiable instrument drawn against available equity).

Some other things to consider

Bankruptcy or corporate law clawbacks may occur where a gift or ‘under value’ transaction has occurred within five years of the party becoming insolvent. This period is generally reduced to four years if the party can show they were solvent at the time of the transaction. For this reason, a solvency statement will generally be requested from the family accountant.

It is important to realise that the implementation of asset protection strategies would likely be ineffective in cases where a party is insolvent or approaching insolvency. Therefore, it is essential to put the strategy in place at the earliest opportunity and get the clawback clock ticking.

There are also corporations, trust and tax law issues that will need to be addressed in circumstances where a company or a trustee intends to make a gift.

If your clients are at risk and holding valuable assets in their own capacity or in their operating entity, it is worth considering whether a gift and loan back strategy can improve their overall asset protection position.

Article by John Ioannou, Partner, McCullough Robertson Lawyers

Image courtesy of fantasista at

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