New Zealand’s 125 year old gift duty rules are now no longer.¹ It is now possible to simply transfer and give assets to a trust and, in the case of an existing gifting programme, to ‘gift-off’ the balance of the remaining debt owed by the trust.

Gifts in this post-abolition era may well be large. For this reason, it is critical that the gift is carefully planned and professional legal and accounting advice obtained. The factors that each person considers will vary because this is a very personal decision: "Is right for me to gift and, if so, how much?"

Key factors will be:

• Are there any disadvantages of making the gift?
• What are the advantages of making the gift?
• Will I be solvent pre and post making the gift?
• Do I have natural love and affection for the beneficiaries of the trust?
• Will I need or want the funds repaid later?
• Is it really what I want to do?

The advantages and disadvantages of gifting

Trusts are established for various estate planning reasons.

For some, it will be to provide a sound structure for future generations. If this was an important goal, then gifting during the settlor’s² lifetime may not be necessary. The settlor’s will should provide for any debt owed by the trust to be released on his or her death. The trust will then hold assets for the benefit of future generations.

For others, perhaps the main purpose was protecting assets from a claim by a partner or spouse under the Property (Relationships) Act 1976. Completing a gifting programme may assist in protecting assets from a claim. For people currently in a relationship, it is important to check that the loan that is being gifted would not be classified as ‘relationship property’. If it is ‘relationship property’ then making a gift may not be successful, and may, as an unintended consequence, create a claim against the trust. It may be better to leave the loan owing. A relationship property lawyer can advise on this.

A trust can provide protection from a creditor claim if the debt is not an existing or potential liability (such as the liability under a guarantee) at the time the gift is made. In some circumstances, the court, on application by a creditor, will claw back a gift. It is, therefore, important that a settlor is in the financial position to safely make the gift.

The trust structure may also remove assets from assessment under an application for a residential care subsidy. However, a gift in excess of $27,000 per annum may be treated as deprivation of assets³ and considered as part of your personal assets for the purposes of the eligibility test. For some people, it may be better to continue a gifting programme at $27,000 per annum rather than make a large lump sum gift.

Solvency

A settlor’s personal financial situation pre and post gift will be crucial in determining whether the gift is reviewable. This involves an assessment of current assets and liabilities and also potential liabilities, including guarantees that have been given.

Under the current law, if a person is declared bankrupt the Official Assignee can set aside any gifts made in the previous two years and, in some circumstances, up to the previous five years.

Also, on application by a creditor, the court can review and ‘claw back’ any gifts that ‘prejudice’ the creditor. The ‘claw back’ can be made if ⁴ :

•  The settlor is not solvent at the time the gift is made, or becomes insolvent due to making the gift.
•  The settlor is engaged, or about to be engaged, in a business or transaction for which his or her remaining personal assets are unreasonably small.
•  The settlor intends to incur, or should have reasonably believed that he or she would incur, debts that would be beyond his or her ability to pay from remaining personal assets.

Rather than gifting all of the debt owed to by the trust, some people may choose to gift part, leaving a sum owing which is sufficient to meet personal debts.

It may be wise, when making a gift, to prepare a statement of financial position showing personal assets and liabilities and projected income and expenditure. This statement could include a declaration stating that the settlor is solvent and can meet anticipated expenditure. This would be a useful record of financial position should the gift be later questioned.

Natural love and affection for the trust beneficiaries

For most people the trust that they gift to only has close family as beneficiaries. Therefore, this consideration is easily answered in the affirmative and there is nothing further to be considered.

However, if a settlor does not have ‘natural love and affection’ for the beneficiaries of the trust, a forgiveness of debt may result in the debt forgiven being deemed income of the trust - resulting in the trust being liable for income tax. This is because the financial arrangement rules will remain, even though gift duty is being abolished.

The term ‘natural love and affection’ is a legal phrase. For people gifting to a trust that includes beneficiaries who are not family members or charities, specialist legal and accounting advice will be necessary.

Loss of ownership

Each person will need to carefully consider whether he or she is comfortable with not personally owning the assets, but having them held by a trust where that person may be one among a number of beneficiaries.

When assets are owned personally, the owner can do with them as he or she pleases – even something frivolous, ridiculous or unwise. When an asset is owned by a trust it must be used and managed for the benefit of the beneficiaries. While the trustees will be able to pay funds to beneficiaries, a beneficiary’s need or use of the funds may be questioned by the trustees and the request possibly refused.

Careful consideration

For each settlor the gifting decision will be personal. In essence, it is a gift of personal property and only the settlor can make the decision whether making the gift is the ‘right thing’ for him or her.

If you have a trust then you need to think about how you will now gift to the trust. This article will raise further queries. The Private Client Team at Hesketh Henry would be happy to discuss with you the factors that are relevant to your gifting decision.

To find out more contact Hesketh Henry (Phone 09 375 8700).

	Mary Joy Simpson, Senior Associate   DD +64 9 375 8776   DF +64 9 365 5276   M +64 21 494 363   E maryjoy.simpson@heskethhenry.co.nz
	Tony Sandlant, Consultant   DD +64 9 375 8773   DF +64 9 365 5233   M +64 21 725 733   E tony.sandlant@heskethhenry.co.nz
	Loren Gerbich, Senior Solicitor   DD +64 9 375 8694   DF +64 9 365 5294   M +64 21 375 852   E loren.gerbich@heskethhenry.co.nz
	Mark Jones, Legal Executive   DD +64 9 375 7635   DF +64 9 365 5435   E mark.jones@heskethhenry.co.nz

¹ The Taxation (Tax Administration and Remedial Matters) Act 2011 came into effect on 1 October 2011.
² A ‘settlor’ is a person who has put funds into a trust.
³ See Regulation 9B of the Social Security (Long-Term Residential Care) Regulations 2005 which sets out different factors that may be considered as deprivation of property or income and “added back” to personal assets or income for the purposes of considering eligibility for a residential care subsidy.
⁴ See Part 6, Subpart 6 of the Property Law Act 2007