Can you protect family assets from debt problems?

It’s official. Family debt problems are on the increase.

Recent government figures show that the number of people getting into serious debt problems is growing.

The Office of National Statistics (ONS) has released data showing the number of personal insolvencies went up in 2016. The prediction is that with inflation rising and wages still lowered more people will find themselves facing debt problems in 2017.

When debt rises family assets are more at risk

1. The bank of Mum and Dad is often the first solution younger people will try if they find themselves in financial trouble.

It’s hard for parents to refuse to help out financially if they see their children (or grandchildren) struggling to make ends meet. This could result in parents sacrificing their own future comfort and security.

2. Raiding the pension pot might be the solution for some people but that’s a very short-sighted remedy – robbing tomorrow to pay for today. What are you going to live on when you retire if your pension fund has been spent?

3. Remortgaging can sometimes help if you’re trying to re-schedule your debts but it’s not always a good way to get out of debt problems. If your credit history is not good the rates of interest are likely to be higher or you could even be refused a mortgage.
4. Equity release might be available if you’re a homeowner but the short-term relief from debt problems will be traded for your main asset. The value of the family home will be swallowed up, leaving nothing for your children to inherit.

Planning ahead to avoid debt problems

Most people just hope they or their loved ones won’t get into debt problems in the first place. But debt issues can appear suddenly, almost with no warning and can happen to anybody.

Financial difficulties can be triggered by personal problems like divorce or ill health or losing a job.

If you wait until you are in financial difficulties before taking action to protect assets you are probably not going to succeed.

If you deliberately try to hide assets from creditors you could dig yourself into deeper trouble.

It’s illegal to hide or give away assets with the deliberate intention of defrauding creditors if you are insolvent.

Even if the arrangement to protect assets was made before bankruptcy takes place your creditors may be able to take steps to recover the assets and you could face extra costs as well as losing the assets you’ve tried to keep safe.

So what, if anything, can you do to protect family assets from debt problems?
It requires careful planning and must not be done at a time when there is any hint of financial difficulty.

One option is to set up an asset protection trust.

What is an asset protection trust?

An asset protection trust is an arrangement that involves transferring assets to trustees who must hold and manage the assets for other people, the beneficiaries.

To protect the assets from future claims by creditors the asset protection trust must be ‘irrevocable’. This means you can’t change your mind later on and ask for the assets to be returned to you or your spouse or civil partner.

Do asset protection trusts actually work?

A lot will depend on the exact circumstances and how well the trust documents are prepared.

The trust must be set up at a time when there is no question of financial difficulty – so the earlier the better.

This is a complex legal area and expert professional advice should be taken.

Image by jk1991 courtesy of freedigitalphotos.net

Have you thought about the risk of debt affecting your family?

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