If you have a family trust you are likely to be familiar with the concept of gifting.
Gifting is utilised when property is transferred to a trust. Because the trust has no money to pay for the property, the parties will instead enter into a deed recording that the trust owes the seller an amount (debt) equivalent to the value of the property.
It is anticipated that from 1 October 2011 gift duty will be abolished. So if you have a family trust or a current gifting programme what does this mean for you?
Under current legislation the seller is able to forgive the debt owed by the trust by an amount not exceeding $27,000.00 per annum tax free. Gifting of any amount over $27,000.00 will incur gift duty, and this has traditionally deterred people from making larger or more frequent gifts.
If in October 2011 gift duty is abolished, this will essentially mean that existing debts owed by a trust to you personally can be completely forgiven. Alternatively property could also be transferred to a trust in one transaction with the entire value of the debt forgiven at once.
For most people asset protection is the main reason for establishing a trust, however the debt owed by the trust is often seen to undermine the protection the trust provides. Although the ability to make unlimited gifts may appear to be an attractive option, it is important to consider the implications that completely forgiving any debt will have on you, as there are a number of issues that require careful consideration.
If future access to the trust fund is an issue it may not be appropriate to completely forgive the debt, as the ability to make demand for repayment may be your only recourse against the trust without having to rely on the good will or agreement of the trustees. Similarly where one partner has advanced their separate funds to a Trust, or parents have loaned money to their children’s trust by retaining the debt, the funds will fall outside the scope of relationship property.
Even if you choose to make a complete gift there are provisions in the Insolvency Act 2006 which may allow creditors to clawback assets. Gifts made within two years of bankruptcy may be cancelled, and gifts made between two and five years ago may be cancelled if the bankrupt was unable to pay their debts at the time the gift was made. There is also the ability to cancel a charge (e.g. a mortgage) where this defeats the rights of creditors.
The Property Law Act 2007 also contains a number of sections that deal with the disposal of property with intent to prejudice a creditor by way of gift or without receiving fair value in exchange. If the person disposing of the property was insolvent at the time of gifting or became insolvent as a result of disposing of the property; if they were involved in a business transaction, and after gifting property had too few assets to be able to carry on the business or the transaction or were incurring debts which they could not pay, the gifted property can be clawed back to meet their debts.
In the case of access to benefits and care subsidiaries, it should be noted that there is no change to how these are assessed. There is still no allowable gifting programme for general benefits and asset limits and gifting limitations remain in place for residential care subsidies.
The provision of information relating to deprivation of income will still be required including details of property that has been transferred to a trust, regardless of when this occurred. This means property may still be taken into account in assessment of this area.
Other concerns raised by the removal of gift duty include the implications of transferring property to a trust in order to prevent a claim by spouse or partner under the Property (Relationships) Act 1976 or after the death of the seller the potential for a claim under the Family Protection Act 1955 or the Law Reform (Testamentary Promises) Act 1949. As has always been the case, any action intended to defeat the claim of another is open to challenge.
The question of whether to gift assets or not is more complex than it first appears. It involves balancing the need or wish for recourse to the trust fund against exposure to creditors, and protection against relationship property and succession claims.
Ask the right questions, ask us, and let us help you make the right decisions about gifting your assets.