By Philip Morgan Rees and Richard Broad*
The abolition of gift duty in relation to trusts, which offers greater flexibility to those with trusts, has been well received.
Now that the new legislation is in place, trust experts are discussing the key factors to consider when acting on abolition, and what trustees need to understand about how the abolition applies to their own circumstances and objectives before freely gifting assets to a trust.
Gift duty, which was abolished on 1 October, formerly applied when a person made gifts totalling more than $27,000 in a 12-month period. Now, gifting may be done freely. The reaction to news of gift duty abolition has been that it’s a good thing – in most people’s minds, less tax can’t be bad.
Other advantages are that there’s now a lot less paper to deal with, because there’s no need when setting up a trust to transfer assets and set up a gifting programme that can last for many years. For instance, you can immediately gift the family home to the trust, with a lot less paperwork required.
Gift with care
It’s important to note that while gift duty has been wiped, many of the other legal safeguards that previously applied to disposing of assets remain in place. People need to know that even with abolition they should continue to take care when gifting.
The safeguards are designed to prevent people giving assets away in an attempt to disadvantage others or unfairly advantage themselves.
Creditor Protection
For example, in relation to creditor protection, there are clawback provisions associated with gifting that will protect those owed money if a person tries to give assets away to defeat creditors. There are many who have a genuine need to ensure assets are protected from potential creditor action, such as the self-employed and business owners, and our advice in such cases is that if you have any doubts about your position with creditors, take steps at the time of gifting to document your solvency as much as you can.
You may be in a solvent position at present, but if something goes wrong down the track, the more proof you or your accountant have that you were solvent and thus acted in good faith in relation to gifting your assets, the more likely it is that the gift will hold up from a legal perspective.
Rest home subsidies
Older people who may be considering going into a retirement home or other residential care might seek the government subsidy available for these purposes, and therefore should gift mindfully.
Many people want to ensure they are eligible for the subsidy, and the law is intended to prevent people deliberately minimising their assets to qualify for the subsidy they can get if they go into care. Abolition does not allow you to gift away assets to a trust or anyone else right before going into a home.
The Ministries of Health and Social Development are closely monitoring this, and even with abolition you still may gift only $27,000 annually – if more than five years before applying – and only $6,000 annually for the five years before applying for the subsidy. If you gift more then go into care, you may be required to access those assets before qualifying for government support.
Similarly, other allowances that are means-tested prevent those who have gifted away assets from applying for Working for Families or other social benefits. Most importantly, people with trusts should seek advice in relation to their specific circumstances.
Though abolition can be very advantageous there may be other factors to consider, and before acting people should be advised on how they might be affected.
Broken trust
The Property (Relationships) Act has long been cited as a reason for the establishment of many trusts, and people in de facto relationships will still need to take care with relationship property that is held in trust. The Act allows for dispositions in certain circumstances, but if you gift away from a partner it can still be challenged in court – this hasn’t changed with abolition.
Other relevant laws to be considered when gifting include the Family Protection Act (which allows people to make claims from estates), the Insolvency Act and the Property Law Act. Gift duty abolition has implications for a range of financial areas –company losses and income tax among others. It can also mean a loss of effective financial control of a trust. We would simply say to people that the implications for their circumstances can be complex, and they should seek the advice of an independent trustee before acting in response to this law change.
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*Philip Morgan Rees is general manager of personal client services at Guardian Trust and Richard Broad is head of legal in personal client services.
10 Comments
"...the law is intended to prevent people deliberately minimising their assets to qualify for the subsidy they can get if they go into care."
How exactly does it do that? It encourages quite the opposite. As the author seems to recognise, the only precaution you need to take is to gift well in advance. And the man responsible for this so-called review of gifting law has just been voted back in to Parliament as part of the governing coalition.
The rules around trusts will have dramatically changed within 20 years - we've borrowed too much today, such that the welfare system will have to have everything you've got by then. If the reason you want to hide assets in order to take advantage of a subsidy is becuase you want to leave the kids with something when you've gone ... give it to them in realtime instead.
Don't waste your time and money on lawyers and trusts.
Yup , that's another 6 or 7 election cycles , 20 years ......... various ne'er do well governments will have come and gone in that time , and each will have done their best to pick your pockets , to give to them that they deem more deserving than you are , to your earnings & savings !
..... save yourself ! .... think & act independently , and outside of " the square " ...
If your skills remain strong , and you keep your investments safe from the long arm of the authorities & fund managers , you'll be in a satisfactory situation to look after yourself and those dearest to you .
Under current rules tipping it in at 27K versus the whole lot when you are 20 odd years away will make no difference...you will be okay. You can get pinged for an excessive gift when made much closer to the app date (5-7 yrs from memory). That aside, you are deluding yourself thinking the same rules will exist in 20 yrs.
Sounds like you've got a touch of the Greek disease..... get someone else to pay the bills! it is immoral when people structure their finances to try and dodge living costs in old age (rest home fees etc) at the expense of their childrens generation who will carry the burden with extra taxation. Many will revolt and either emigrate (kiss goodbye to seeing the grandchildren) or when the demographics allow, politically destroy any arrangement now enjoyed. You need a kick in the a*** not an accountant.
Yeah yeah yeah. Listen up.
A quick calculation: I reckon I will have paid around $1m in income tax over my working life. I have private health insurance, so I have zero demand on the public healthcare.
If I happen to fall on hard times in 30 years time, why should my wife have to sell the family home to pay for my rest home care? I have no other savings or assets.
Get a life, people.
First and last time that I bother to post to this blog!
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