Since the abolition of gift duty on 1 October 2011 many people are asking whether they should gift away all of the debt which their Trust (or others) might owe them. This month we look at some of the issues that you need to consider before making your gifting decision.
The answer to this question is not straightforward, and requires for a consideration of a number of factors. It is definitely not just a case of “one size fits all”.
Gift duty has had a significant impact on the operation of trusts. Prior to 1 October 2011, if you transferred property to a Trust at market value, an individual could only forgive $27,000.00 a year of that resulting debt, if gift duty was to be avoided. This has limited the transfer of assets to Trusts.
What factors should be considered before making the gifting decision?
1 Creditor Protection
A Trust can protect personal assets against possible future creditors.
Following the repeal of gift duty, significant assets can be transferred to a trust without the need for a debt forgiveness programme. As a result, creditors will not be able to demand the unpaid balance of the debt to satisfy their claims. You should be aware however that it is more likely that creditors will make more frequent use of the “claw back” provision in both:
The Insolvency Act 2006, and
The Property Law Act 2007 which enable transfers to a trust to be set aside in certain circumstances.
Before making your decision to gift away all or part of the debt which is owed to you, we recommend that you complete a Solvency Statement which shows the actions you are taking are not designed to defeat the rights of creditors.
2 Tax Issues
The repeal of gift duty is unlikely to have a significant impact on the ability of individuals to reduce their taxable income by transferring income generating assets to another person or entity. The recent Supreme Court decision of Penny & Hooper v Inland Revenueemphasizes that where income shifting practices cross the line, the Inland Revenue Department will apply the anti-avoidance provisions, and the arrangement will be set aside.
3 Relationship Property
Before a relationship begins it may be advisable for you to transfer all your assets to your Trust.
Once you are in a relationship, then transferring your assets to a Trust is not likely to be effective, and a better option may be for the parties to enter into a “Contracting Out Agreement”.
4 Rest home subsidies
The rules regarding eligibility for a rest home subsidy are complex and Work and Income New Zealand has a strict regime of assessing whether or not you may have “deprived” yourself of assets prior to a means test. See our article for further information regarding implications for rest home subsidies.
5 Claims against estates
To help avoid a claim against your estate one solution is to transfer assets to a Trust, as anything held by a Trust does not form part of your estate.
With the abolition of gift duty you can give away all of your wealth during your lifetime, leaving no estate that could be subject to a claim after your death.
So what next for gift duty?
The repeal of gift duty does not necessarily mean that everyone should set up a Trust and transfer their assets to a trust, unless there are good reasons for doing so.
If you already have a Trust and a gifting programme in place, the decision of whether you now gift all or part of the remaining debt will depend on why you set up the Trust in the first place, together with a careful consideration of your personal (and perhaps business) circumstances, taking into account the above factors.
Please contact us to discuss your gifting options or whether setting up a Trust is the right option for you.