On 1 October 2011 gift duty will be abolished. It means you will be able to give away assets, of any value, and forgive any existing loans in full, to a trust without incurring gift duty.
But does this mean you should?
Before you answer this, consider the following questions:
- Have you given any personal guarantees? Will you still be solvent if you make the gift?
- Could you be the subject of a relationship property claim?
- Might you want to apply for a government subsidy?
- Do you want to remain a creditor of the trust so that you have additional rights to the trusts assets over and above the other beneficiaries?
- Are you subject to any current creditor or IRD claims?
For many people, the obvious course of action would be to do a one-off gift and divest all personal assets into a trust all at once. Unfortunately, it is not that simple. The decision on how to deal with existing loans and future asset transfers needs to take into account each individual's circumstances.
A one-off gift may well be the best course of action for an individual in a risky business venture where creditor protection is important, or where the debt could be subject to property relationship or other such claim. Is the asset to be gifted your own separate property or is it relationship property?
A one off gift may also prevent immediate family from being able to contest a will, as there are no estate assets to fight over.
On the other hand, there are equally as many situations when a one-off gift may not be appropriate, for example, where a settlor of a Trust is reliant on the Trust for living expenses. While the loan is in place, the settlor has an absolute right to call on the loan for funds. If the debt is forgiven, the Trustees can decide whether or not to advance monies to the settlor/beneficiary.
There are also a number of other considerations to take into account.
Any gift made can be cancelled if the donor was insolvent at the time of making the gift. A one off gift may also disqualify a person for subsidies for residential care in the future.
Recently introduced rules for Look Through Companies restrict the amount of losses a shareholder can utilise. This means the shareholder may need to retain ownership of some assets in order to use those tax losses. Gifting all their assets into a Trust could result in more tax being payable.
It is also possible that the ability to transfer all assets into a Trust will attract the attention of creditors and the Inland Revene Department, scrutinizing the Trust to determine whether or not it has been properly established and administered.
Government officials and Inland Revenue officers have made it clear that current NZ legislation will be used in future to prevent individuals from divesting themselves of assets overnight to defeat creditors, relationship partners and Government agencies providing social assistance (rest home fee subsidies, student loans etc).
Gifts defined as ‘extraordinary’, i.e. they exceed $27,000, may be subject to claw back at any time and legislation such as the Insolvency Act, the Property Law Act and Social Security regulations will be used in future to police this area. The message is clear - with the abolition of gift duty, current legislation will increasingly be used along with organisational changes to police this area by the likes of WINZ, IRD, the Official Assignee and other agencies. Long story short - substantial gifts should not be undertaken without seeking professional advice.
The ability to gift, without being restricted to $27,000 per year, will be a welcome change to the law for many. But you should take your time over the decision to gift and consider the implications carefully.