If you didn’t know it already you can now gift as much as you like without paying the government gift duty. Before 1 October 2011 you had to pay the government gift duty if you made a gift worth more than $27,000.00 in any one year. The repeal of the law requiring payment of gift duty will have a significant impact on how people structure their affairs and will provide some planning opportunities.
Family Trust gifting programmes
Thousands of people who have been undertaking gifting programmes will be able to gift the total amount owed to them with one set of documents, instead of gifting the debt at the rate of $27,000.00 per year. Most of these progressive gifting programmes relate to a debt owed for the transfer of assets to a family trust. Typically the donor was transferring his or her assets to a family trust so that they would not be available to meet potential claims against the donor’s assets – for example, claims by creditors; relationship property claims under the Property (Relationships) Act 1976 by partners or spouses; and claims under the Family Protection Act 1955 by family members who were not being provided for adequately under the donor’s Will.
To gift or not to gift?
For most people it will make sense to complete their gifting all in one go, rather than continue with their annual gifting programmes. By completing the gifting in one go, the annual cost of the gifting will be avoided. Also, there will no longer be a debt (which is an asset of the donor) against which creditors’ and relationship property and family protection claims may be made. However, for some people it will not be appropriate to complete their gifting in one go.
Why not gift?
For some people the debt owed to them by the trust might be a potential source of funds. If they need access to funds then they can call on the trustees to pay back the debt owed to them. If they have no debt to call on they would have to rely on the agreement of the trustees to obtain funds from the trust. The debt may also provide some leverage over the trust where people are reliant on the goodwill of the trustees to use trust property – for example where their home is owned by the trust. The ability to access trust funds or use trust property may be particularly important for people who do not have the power of appointment and removal of trustees.
It may be advisable for some people who are likely to need full time residential care in future, to limit their gifting to the amounts allowed by the Ministry of Social Development so that they qualify for the residential care subsidy. Other people might qualify for the residential care subsidy if their home is owned by them personally rather than their family trust.
Clawing back the gift
With the increasing numbers of gifts resulting from the abolition of gift duty, creditors will be more likely to investigate their ability to claw back any gifts made by the debtor to ensure that they are paid. There are various provisions in the Property Law Act 2007 and the Insolvency Act 2006 which enable gifts to be clawed back. If the gift is clawed back then it might be available to meet the creditor’s claims against the donor, so long as the person receiving the gift is innocent of the donor’s circumstances and has since changed his or her position.
Under the Property Law Act a creditor may be able to claw back a gift made at any time if the donor was insolvent or became insolvent as a result of making the gift; if the donor was engaged or was about to engage in a business or transaction for which the remaining assets of the donor were unreasonably small; or if the donor would incur debts beyond the donor’s ability to pay.
Under the Insolvency Act, the Official Assignee may cancel gifts two years prior to bankruptcy, whether or not the donor was insolvent at the time the gift was made. The Official Assignee can also cancel gifts made by the donor within 2 to 5 years prior to bankruptcy unless the donor can prove he or she was not insolvent at the time of the gift.
It may be difficult to determine whether a donor will be insolvent or not as a result of making a gift. Most professional advisors are recommending that the donor undertake a solvency test prior to forgiving the debt, and if the donor is solvent, advising the donor to sign a solvency certificate. This will turn the donor’s mind to whether he or she is in fact solvent and can afford to make the gift. It will also provide useful evidence if anyone sought to claw back the gift in future.
Finally...
As everyone’s circumstances are different and there are many factors to consider when deciding whether to gift, professional advice should be sought before any gifting is completed, whether or not the gifting is the completion of a family trust gifting programme or any other significant gift.
Please email me at [email protected] with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.
Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.