What is ring fencing? It’s a technique used in many different sectors, from government to business to finance, and is a method of protecting assets. If you are ready to up-level your Estate Plan, perhaps it’s time to consider how ring fencing could help you separate certain assets from others, and thus provide them with higher levels of protection. Trust & Will explores the ring fenced meaning, real-world examples, and other helpful information to know.
What is ring fencing?
Ring fencing is the process of protecting a specific group of assets by structurally separating them from other assets. This protection mechanism is used in several different fields, from business to medicine to estate planning. The precise ring fenced meaning can shapeshift based on the context in which it is used. We go over several examples later in this guide.
What is a ring fence?
A ring fence is the legal structure used to separate assets from others with the purpose of protecting them. Ring fencing is the act or process of setting up that structure, while the ring fence is the structure itself.
What is the purpose of a ring fence?
The term “ring fencing” is borrowed from agriculture. A ring-fence is built to help keep farm animals in and to keep predators out. This concept has been borrowed and translated into the financial sector. The purpose of a ring fence is to protect certain assets while keeping out the “bad,” such as risk, market volatility, financial loss, debt seizures, bankruptcy, or avoidable taxation.
In financial accounting, a ring fence is used to separate a specific group of assets from being mixed in with others, thus protecting them. This purpose also applies in estate planning, such as transferring specific assets into a separate Trust, and thus protecting them from certain taxes, creditors, and probate process. In business, ring fencing is used to separate certain parts of the business from others. Last but not least, government bodies may leverage ring fencing through legislation to manipulate the economy and help protect consumers in creative ways.
How a ring fence Works
A ring fence works by separating assets (or business entities) from others in order to protect them. Usually, the ring fence is a virtual structure, meaning that it is not physical, but separate assets using a business entity, tax structure, or other type of method of separation. This method of separation used will vary depending on the individual or organization, as well as the goals they are trying to achieve.
For instance, a business might separate assets by creating a subsidiary unit and creating a separate bank account and bookkeeping record. This is a ring fence that could shield parts of the business from lawsuits or bankruptcy.
An individual might create a Trust and transfer certain assets into it to protect them from creditors or to reduce their taxable estate.
What are the benefits of ring fencing?
Ring-fencing can serve many benefits. The overarching benefit of putting a ring fence into place is to separate assets or entities to shield them from risks that they may otherwise be exposed to. Examples of common risks that ring fences protect against include market volatility, taxation, creditors, and bankruptcy.
While this is the key benefit, different entities and individuals may use ring fencing to obtain specific outcomes. For instance, an individual could create a Trust for the specific purpose of protecting their assets from the probate process. A bank might ring fence their checking and savings units so that they aren’t susceptible to economic strife associated with their investment units. A business might create a subsidiary to shield the parent holdings from a major lawsuit. The opportunities and applications are endless. Here are several examples that help illustrated different types and examples of ring fences.
Ring fencing examples & types of ring fences
Here are a few examples of how ring fencing is used in different cases.
A corporation might utilize a legal structure to separate its subsidiaries from the parent business, and thus their respective assets. The act of creating this clear separation between subdivisions is an example of ring fencing.
An investor might move a subset of their assets offshore to reduce their income and thus their tax liability. They may also do this to protect some of their assets from getting seized by debtors. This is also called ring fencing and its legality is often called into question. Some investors might take actions that are illegal, while it is possible to do so legally when staying within set regulatory limits.
Last but not least, ring fencing may stem from regulatory requirements. For instance, the United Kingdom required large banks to legally separate their retail units from other units following the financial crisis. This regulation was designed to help protect essential services from other parts of business (for instance, protecting checking and savings from investment banking.)
Protect your assets with a Trust
This guide that explained the ring fenced meaning provided a key insight to how ring fencing can have many applications. Banks, businesses, and regulatory bodies alike can use ring fencing on large scales. However, individuals can leverage ring fencing as well.
Although you may not be transferring investments to offshore locations any time soon, a practical application of ring fencing is Trust-based estate planning. A Trust is a fiduciary arrangement in your Estate Plan that separates certain assets and property away from the rest of your estate. Savvy individuals do this because a Trust shields these assets in a number of ways. For starters, they protect the assets from creditors. Further, Trust assets do not have to pass through the probate process, thus preserving more of the estate for beneficiaries. Last but not least, Trust assets are provided certain tax benefits, thus reducing the estate’s overall tax liability. In other words, a Trust is a ring fence that is often used by individuals to protect their assets.
Trusts often get dismissed as a tool used by the wealthy. While the wealthy certainly use Trusts, this notion is misleading. Trusts are beneficial to absolutely anyone planning their estate. Further, those with modest assets and property can and should take the extra steps necessary to protect their assets for themselves and future generations. Luckily, Trust & Will is on a mission to break down these barriers. Take our free quiz to see where you should get started, or compare our different estate planning and settlement options today!
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