Protection Of Assets: Playing Your Cards Right As A High-Risk Individual

What do doctors, lawyers, accountants and directors have in common? Not much, except for the fact that they are individuals who are exposed to high financial and legal risks. 

As professionals, they have a duty to provide professional services that meet the required standard. Since the very nature of their employment requires them to exercise their professional judgment, there may be instances where these high-risk individuals are deemed to have failed to meet the required standards. If this happens, these high-risk individuals may be sued for negligence, malpractice, breach of fiduciary duties and/or breach of statutory duties, etc. 

The direct consequence of this is not only having to defend these claims in costly and lengthy legal proceedings, but also the risk of facing insolvency and bankruptcy proceedings involving seizure and sale of their personal assets if litigants successfully obtain and seek to enforce a court judgment against them.  

Such a sequence of events can unfold very quickly and if proper asset protection and mitigation of risks is not done, the high-risk individual may find themselves in a position where they stand to lose everything they have worked so hard to earn. 

One of the best strategies for protecting the assets of high-risk individuals is to set up a living trust. Trusts serve as an effective barrier against potential creditors and legal liabilities. By placing assets into a trust, a high-risk individual effectively transfers legal ownership to a trustee who then holds the assets on trust for the benefit of its beneficiaries. 

In Malaysia, a settlor may name himself as a beneficiary of a trust so long as he is not the sole beneficiary. Hence why the concept of setting up a living trust is particularly attractive for high-risk individuals. However, the effectiveness of trusts in protecting assets from potential creditors and claims would also depend on whether the trust is a revocable trust or irrevocable trust. 

Revocable trusts allow the settlor to maintain control over the assets in the trust, and also allow the settlor to make amendments to the trust at any time. These amendments can include changing the named beneficiaries, appointment of trustees, removal of assets from the trust, termination of the trust, among others. Hence, revocable trusts are flexible and has the benefit of bypassing time-consuming probate process as assets can be transferred directly to beneficiaries or continue to be held for beneficiaries’ benefit. The downside to revocable trusts is that it does not offer the same level of protection against creditors and claims as irrevocable trusts. 

Irrevocable trusts provide the ultimate protection against creditors and claimants. This is because irrevocable trusts, as its name suggests, are permanent and cannot be revoked. Once assets are transferred from the settlor to the trust, the settlor ceases to have control over the assets and the assets assigned to the trust cannot be retrieved. The separation of legal and beneficial ownership means creditors and claimants have no right to assert a claim over assets placed in a trust. 

It is for this reason that irrevocable trusts are often favoured by high-risk individuals. By creating an irrevocable trust, they enjoy ultimate protection from creditors and claims while still reaping all the common benefits of a trust such as avoiding the lengthy probate process, structuring tax mitigation strategy, ensuring proper wealth management, and distribution of assets to named beneficiaries. 

In any event, trusts can be set up in a way to suit every individual’s needs. This is not limited to just protection against creditors and liability stemming from professional life, but also any potential risk arising from divorce and issues in their family life. As the awareness of the benefits of trusts grows, there is an increasing interest amongst professionals and other high-risk individuals in setting up trusts so that they are playing their cards right in their high-stakes lives.