Remember playing with dominoes as kids? We’d place our dominoes upright in a line and then push one over and each successive domino falls on the next domino until they have all fallen over… good fun! But not so good if it happens in real life.

So how can we avoid the domino effect on our investments?

There are a number of strategies, usually to do with compartmentalising risks. Just think about the line of dominos again - if we had taken out every second domino, then only the first domino would have fallen over. We can apply the same logic to our investments.

The obvious means of compartmentalising risk is separating ownership of our various assets and investments. Business investments are usually high risk and have a relatively high failure rate. So the ownership of each business should ideally be in a separate legal structure such as a limited liability company. In most circumstances if a limited liability company fails, assets of the company are available to unpaid creditors. Company creditors do not usually have recourse to other assets or against the company’s shareholders so long as share capital has been called and paid for, the shareholders do not owe the company money, there have been no “preferred” payments to shareholders, and no personal guarantees given.

However, sometimes the directors of a failed company can be held personally liable for company debts (for example if the company traded while insolvent, or the director acted fraudulently, negligently or recklessly etc). Therefore it is prudent that directors do not personally own assets and/or investments.

If the business owns substantial assets such as valuable plant, vehicles or commercial premises with little debt against them it is often a good idea for these assets to be sold to another legal entity (such as another limited liability company or family trust). The business would then rent/lease the assets and pay market rate to the other entity for the use of the assets. If the business fails the creditors will not usually have access to the rented/leased assets, as they are not owned by the business.

If you (or your family) personally invest funds into a business then consider registering a security over the business assets. If the business fails your registered loan will usually rank above unsecured creditors.

It is usual to place the family home in a family trust and complete a gifting programme. The gifting programme may take some time and until complete the settlor of the trust is usually still deemed to own an asset (the ungifted loan). To protect against the settlor’s ungifted loan being called upon by creditors special loan clauses can be employed stating that the loan cannot be called up for a certain number of years, or only on death.

If you own investments with little or no debt secured against them, such as shares and/or managed funds, a family trust is often a good ownership structure for such investments.

Also consider transferring ownership of life insurance policies to your family trust to ensure any payout is protected (and does not need to be subsequently gifted to the trust). The family trust may also own shares in your business/investment company(ies).

Assets must be transferred to a trust at market value. The market value is usually converted to a loan, which is subsequently gifted. Since each individual can only gift up to $27,000 per annum without paying gift duty, transfer of assets and a gifting programme should commence as soon as possible.

Many property investors initially borrow against the equity in their family home to provide deposits for investment properties. Care needs to be taken to ensure that the borrowing does not jeopardise the family home. We usually recommend that the rental property loan is not with the same bank as the family home mortgage.

For example, the family home is worth $500,000 and currently has a mortgage of $150,000 with Bank 1. If you decide to borrow against the equity in the house to buy rental property we suggest you request Bank 1 to increase borrowings to say $400,000 (80%). The $250,000 increase would be by way of flexi loan and no interest is paid until the loan is actually down drawn. Bank 1 has security over the family home.

If you then wanted to buy an investment property for $300,000 we suggest you approach Bank 2 for say 80% of the investment property value ($240,000). Bank 2 would have security only over this investment property. You would use $60,000 of the flexi loan facility from Bank 1 to pay the balance of the purchase price. You would still have $190,000 available flexi loan facility from Bank 1.

If you wanted to buy a further rental property once again we suggest you approach a different bank, Bank 3. Once again ask for say 80% of the value of the second investment property from Bank 3 and use the flexi loan facility from Bank 1 to complete the purchase.

There are a number of advantages of this funding approach – first, each bank has security against only one property. If one bank forecloses you will probably lose only one property. However, if a bank has cross security over a number of different properties then you have a greater risk of losing more than one property.

Secondly, interest is tax deductible on 100% of the finance used to purchase the investment properties.

Thirdly, if you sell a property you repay the bank that had security against it. You do not have to change any of the other borrowings unless you wish to.

Banks usually take as much security as possible. If you have two properties and borrow for both from the same bank they will usually cross secure over both properties. If you get into financial difficulty or wish to sell a property you may have to change security for all borrowings, which can be complicated and expensive. If borrowing additional money you will have to go back to the same bank, since they hold security over all your properties. This weakens your negotiating position.

When structuring your affairs do compartmentalise and minimise your risks, but also consider the tax implications. Ideally you should be talking to both your lawyer and your accountant as part of this process.