Prior to October 2011, if you gifted more than $27,000 to any person or trust in a 12 month period, you would have to pay gift duty. So, if you wanted to transfer an asset to your trust, you sold it to the trust and the trust owed you the purchase price. Every year, you ‘forgave’ the repayment of $27,000.00 and eventually the debt was completely extinguished.
In October 2011, the government abolished gift duty. This left thousands of people wondering what they should do about the debt that was still owing to them by their family trust. On the face of it, you can now just forgive the whole debt in one go. But is this the best option?
Unfortunately, there is no ‘one size fits all’ answer to this question. The answer depends on many factors such as, the size of the debt, your age, whether you have a partner or not, your reason for establishing the trust and your family situation.
If your trust owes you money, you can:
- Forgive all of the debt in one go.
- Forgive most of the debt in one go, but leave an amount still owing.
- Progressively forgive the debt at the rate of $27,000 per annum per person (or $13,500 per person if you are part of a couple).
- Do nothing and leave all of the debt owing.
What you should consider when making your decision?
Are you concerned about paying for your rest home care in the future?
You may have set your trust up so that you could progressively transfer your personal assets to the trust, thereby maximising your chances of receiving subsidised rest home care.
The legislation governing gift duty was different to the legislation governing the provision of government funded residential care. Although there are now no gift duty consequences for gifting assets to a trust, there are definitely consequences when it comes time to apply for a residential care subsidy.
The Ministry of Social Development allows you to make the following gifts:
- Up to $6,000 per year in the 5 year period prior to your application for a residential care subsidy.
- Up to $27,000 in any 12-month period prior to the 5 year period.
If you gift more than is allowed, when you apply for a residential care subsidy the excess gifts will be ‘clawed back’ into your asset assessment. For example, if you forgive a debt of $500,000 in 2015 and apply for residential care in 2035, $473,000.00 will be clawed back into your asset assessment. Note there is no ‘safe’ time frame for making gifts. Any excess gifts made during your lifetime are at risk of claw back.
If you have a partner, you will be assessed as one economic unit and the assets and income of your partner will be taken into account. This includes gifting undertaken by your partner. The current allowable gifting is $27,000 per year, per application. If you and your partner both gifted $27,000, totalling $54,000.00, then $27,000.00 of that year’s gifting would be considered as excess gifting. It may therefore be prudent to reduce your gifting to $13,500 if you have a partner who is also making gifts.
Making a large gift could affect your later entitlement to residential care subsidies. If you want to maximise your chances of receiving a subsidy, you may be better to continue with a gifting programme, and progressively forgive the debt at the allowable rate.
We can help you to work out whether this is the right option for you, however please be aware that this will involve some ‘crystal ball gazing.’ You will need to make decisions based on the likelihood of uncertain events occurring.
Are you at risk of creditor claims?
The law recognises that people are entitled to take steps to protect their personal assets from the consequences of business failure. It is common to establish a trust so that personal assets can be safeguarded from creditor claims. Any debt owing to you by your family trust is considered a personal asset and is at risk. For this reason, it is a good idea to forgive all the debt.
However, it is essential that this is done at an early stage and while the business is still successful. If the gift has the effect of defeating creditors, it could be set aside at any time. Further, the Official Assignee can claw back gifts made in the 2 years before bankruptcy. Gifts made between 2 and 5 years prior to the bankruptcy can also be set aside if you were insolvent at the time the gift was made. There is a rebuttable presumption of insolvency and the trust would need to prove you were solvent at the time the gift was made.
Do you want to protect yourself from future relationship property claims?
Personal assets which have been transferred to a trust prior to the beginning of a relationship will generally be protected if that relationship fails. If you are currently single it may be prudent to forgive all the debt owing to you by your trust so that it is better protected within the trust structure. However, you should be aware that this protection is not absolute as the court has a limited ability to access trust funds to compensate the disadvantaged partner.
Conversely, if you are in a relationship you need to consider whether, in making the gift, you are disposing of relationship assets in a way which has the effect of defeating your partner’s legal claim to those assets. If you are in any doubt, you should seek specific legal advice.
Do you think you may want the money back in the future?
Most trust debts provide for repayment ‘on demand.’ So, while the debt is outstanding, you are entitled to be repaid by the trust and you can protect your right to live in the trust property.
Before forgiving all the debt owing to you, you should consider whether it would be prudent to leave some, or all, of the debt owing. This will be most important if you do not hold the power to appoint and remove trustees of the trust.
This is a very brief summary of the main factors you need to consider when deciding what to do with your gifting programme. Every person’s situation is different and you should seek legal advice on your personal circumstances before making any decisions.