Trusts and the abolition of Gift Duty

Trusts and Estates

The Government introduced legislation that abolished gift duty as from 1 October 2011. Frustrating gifting programmes of $27,000.00 per Settlor per year are no longer be necessary! Settlors can immediately forgive all the debt their family trust owes them by making one final gift and future transfers of assets has also become much easier.

However, this positive change will be countered by greater scrutiny and responsibility being placed on trustees. We outline some of the areas where trustees will need to be more vigilant below:

Financial Records

Gifting programmes have meant that trusts have documented loans (including loans to family members), gifts and minutes around financial transactions well. There is a real danger that future standards could slip, meaning that future loans are not properly documented. Poor documentation can make asset protection ineffective and Trustees liable. It is more important than ever that trustees record all loans and other decisions comprehensively in writing.

Creditor Protection

If a Settlor has put their assets into a trust and later becomes bankrupt, the Official Assignee can "claw back" any outstanding loan the trust owes that Settlor - as that loan is one of the bankrupt's assets. For this reason some people believe the old gifting regime, in which the debt back is reduced gradually over a number of years, provides creditor protection which has been lost now that gifting limitations have been abolished.

The Government believes that other existing protections for creditors are sufficient, and if not, could be strengthened if the need arises. These protections are:

  • The Insolvency Act which (presently) allows the Official Assignee to cancel gifts made within two years of bankruptcy; or within five years of bankruptcy if the person is unable to demonstrate that they were solvent when they made the gift.
  • The Property Law Act which allows transfers of property to be set aside where there is an "intention to prejudice" the interests of the creditor. The more recent the transfer, the more likely the court will be prepared to set it aside.
  • The Settlors' financial situation at the time they make any gift will now come under far more scrutiny than before. The test will be whether they were solvent and able to pay their debts as they fell due at the time they made the gift. We will most likely be advising clients that they should hold proof of their solvency at the time that they make any gifts. If they were not able to prove this at a later date then their gift might be set aside.

Rest Home Asset Testing

The Social Security Act & Regulations limit to $27,500.00 in total, the amount of gifting by an applicant during a five year period immediately prior to an application for a residential care subsidy. Any gifting over $27,500.00 can be "clawed back" by WINZ. More significantly, WINZ also has discretion to look at assets which have been transferred to a trust at any time prior to an application, not just in the previous five years. If WINZ considers that the applicant deliberately divested himself or herself of assets in order to obtain a subsidy, WINZ can, at its discretion, take into account their value in assessing the applicant's eligibility for such a subsidy and can deny the application.

Up until now, the approach taken by WINZ has generally been not to claw back any assets if they were put into a trust more than five years previously. The regulations may now be applied more rigorously to ensure people do not receive residential care subsidies where they have recently put their property into a trust. Alternatively, the regulations might be changed to include only the value of assets that they have transferred to a trust in the six years preceding the application.

It still remains our advice that creating a family trust as early as possible - during your 40's if not before - is the best way of ensuring that your assets are well protected and are not at risk of any claw back.

Genuine and Proper Administration

The Courts are increasingly focusing on the need for regular and prudent administration of the trust as a way of showing that it is genuinely operating - rather than as any form of "sham". Until now, annual gifting meetings provided a reason for Trustees to meet and experts fear that Trustees without ongoing gifting programmes may fail to meet, record their decisions and thereby open themselves up to future attack. Good administration of trusts, including holding trustee meetings on at least an annual basis, with written minutes to show appropriate financial, legal and accounting advice has been obtained, is essential to ensure a trust delivers genuine asset protection.

Intentionally Outstanding Debt

Many clients' financial advisors actually require their clients to leave a debt owing to them by their family trust and to not forgive it. This is so that the debt can be repaid from future trust income or capital. Simply assuming that loans to a trust should be forgiven in one large amount once the law changes in October without taking specific advice would be dangerous.

Conclusion

There is no one answer to whether the Settlors should make one final gift. For many trusts this will be a welcome opportunity to complete their gifting programmes. However, this change in law will result in further changes in approach by the courts, IRD, WINZ and others.

We believe that it is now more important than ever that Trustees meet, make decisions and record them clearly each year. Trustees who choose not to do this do so at their peril.

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Copyright © Cavell Leitch. All rights reserved. Redistribution is only permitted with express written permission. For enquiries please contact us. This article by its nature cannot be comprehensive and cannot be relied on by clients as advice. It is provided to assist clients to identify legal issues on which they should seek legal advice. Please consult the professional staff of Cavell Leitch for advice specific to your situation.