KEY POINTS:
I get angry when I see people such as Rod Petricevic and Kim Spencer go bankrupt but maintain the same lifestyle they had before they went broke. That they should continue a luxurious lifestyle with expensive cars and houses does not feel right _ my values are affronted.
That is my first reaction based on values and feelings. But when I put them aside and start to think about it, I come away with a different answer.
Petricevic and Spencer are second-time bankrupts and people's lives have been wrecked by their failures.
Both are reported to be able to maintain their lifestyle because they have assets in family trusts.
Shouldn't we ban family trusts _ or at least restrict how they can operate _ so that on business failure, all of the assets of the responsible people go to creditors? The answer to that is no, it really is not that simple.
First, there is already a great deal of law around the use of family trusts to protect assets from creditors.
It is not possible for Petricevic to give his Porsche 911 to his family trust just before going broke. At the very least, he would have to pay gift duty _ and it would be most likely that the official assignee would roll back the gift of the car using the Property Law Act or the Insolvency Act.
Petricevic and Spencer could also have problems with their expensive houses, reportedly worth about $4 million. This is a huge amount of money to have gifted. You can only gift $27,000 a year without paying gift duty.
These properties may have been in the trusts for a long time, of course, but even if their values had been much lower, a lot of gifting would probably be needed. It is likely the official assignee, who already has wide powers under the law to set aside transactions, will have a good look at Petricevic's and Spencer's trust arrangements _ the trusts' establishment, management, finances and gifting will be scrutinised.
As a matter of public policy, society must hold on to the idea of limited liability. The prosperity of modern economies rests on the concept of limited liability. We have companies with limited liability _ family trusts are a further step in that direction.
There are thousands of people who start small businesses who might not do so if all their family assets are on the line when things go bad. People would simply not start businesses if all of their family assets were available to creditors when things go wrong.
I think it is wise for anyone in business to protect their family's assets. It seems to me reasonable that when one partner or spouse starts a business, the other has a right to protection of the family home and other assets.
In my view, people in business should have appropriate ownership structures for their assets _ the use of companies, shareholders' agreements, property sharing agreements and family trusts are all a legitimate part of this.
I have long said there is public distaste when high-profile business people go broke but maintain their lifestyles, and I do not want to advocate for Spencer and Petricevic.
However, we must realise there is already good law around the use of trusts to protect assets, which stops people easily flicking assets sideways out of creditors' reach. We must also acknowledge to encourage entrepreneurism, business people must be able to limit their liability.
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Each week best-selling financial author Martin Hawes will share his strategies to help you grow your wealth. You can email your burning questions to info@wealthcoaches.net or andrea.milner@heraldonsunday.co.nz