Legal Tip 97: Spousal loans as an asset protection strategy

Spouses are different legal persons to each other in Australia. One spouse going Bankrupt has no direct effect on the other. Spouses are not liable for each other’s debts. This is not the case in other countries where one spouse can be liable for the debts of the other. The assets of a spouse are not at risk unless they have been transferred from the bankrupt spouse or the spouse’s property has been used as security.

One very simple and low cost asset protection strategy is the spousal loan strategy. If B lends to C the asset remains an asset of B. That is ownership belongs to B. If C were to become Bankrupt B would be a creditor. Creditors share the pool of assets of the bankrupt according to priorities.

A loan with no security would mean B is an unsecured creditor of C

However B could also take security for the loan. This may be a second mortgage over C’s investment property. If C went Bankrupt B would be a secured creditor. The bank would generally have a first mortgage so they would take possession of the property and sell it to recover their money. Any proceeds of the sale left over from the bank would then go to the next secured creditor which would be B. B would take its money up until what is owed and then the rest would form part of the residue and be divisible amongst the unsecured creditors.

keywords: "Spousal Loan"; "asset protection"

 

Hi Terry,

Many thanks for the tip. It's very informative and is a interesting strategy for the asset protection. May I ask if B and C are husband and wife and both names are on the title of an IP. But only B put the name as the landlord on the rental agreement. By using the spousal loan strategy with second mortgage on that IP, will it help them if tenants sue and win?

 

There are 2 broad areas the tenant could sue on.
1. Contractual disputes - leases etc and one name could help here because they would not have a legal contract with the other owner.

2. Negligence - such as occupier's liability. If a tenant injures themselves they will sue the owners of the property. So having one name on lease probably won't help here.

But if there is another entity with a mortgage over the property then this will mean the mortgagee has priority over claims of non secured creditors such as judgment creditors. How strong it will be will depend on when it was set up, the parties involved and if there is any artificialness to the arrangement.

 

Many thanks, Terry. The information is very useful.