Typically, Family Trusts work on the basis of a transfer of assets into the Trust with a debt back for the full value of those assets. The debt is then progressively gifted – currently at $27,000.00 each 12 months to avoid paying gift duty.
After the Government announced its intention to abolish gift duty, many gifting programmes were put on hold. It will now be possible to make a total gift of all indebtedness owed by a Trust on 1 October 2011.
Two decisions need to be made at the outset:
- Do you wish to be in a position where you can receive capital from the Trust from time to time by way of debt reduction rather than income? If so you may wish to only make a partial gift.
- How important is it to you that you qualify for a Rest Home Subsidy? If you are not unduly concerned about qualifying for this subsidy, then you should probably ignore the quite complex rules currently applying to the regime and make a total gift. If qualifying for rest home subsidies is important to you, then you need to obtain professional advice both from your accountant and lawyer before making any gift.
The one certainty is that whatever the rules relating to the Rest Home Subsidy are today, they will change in the future.
The Way Forward
If you wish to proceed with gifting, then:
- If you have annual accounts prepared for your Trust you should work with your accountant to find out the amount of indebtedness as at 31 March 2011. If that is the amount you wish to forgive then the appropriate documents should be put in place to be activated on 1 October 2011.
- If you do not have annual accounts and simply rely on successive Deeds of Forgiveness of Debt (probably because your home is the only asset in the Trust), then you should consult your solicitor to take the appropriate steps to forgive the entire outstanding debt on 1 October 2011 or, depending on your circumstances, to forgive only part of the debt.
Pitfalls
- A positive step needs to be taken to effect a gift. A deed is the best way to implement a gift as otherwise there is always the risk that someone (whether it be IRD, WINZ, family members in a family protection claim or a creditor) will say it is a debt, not a gift and is repayable. Although gift statements will no longer be filed with the IRD, a deed of gift should nevertheless be prepared and signed to establish the gift has been made.
- There will be situations where a Trust has given security over Trust assets (e.g. the family home) in return for banking accommodation which has been provided to the person who established the Trust. It is important that once the indebtedness to the bank is repaid, the Trust’s guarantee and the mortgage given are discharged.
Reasons for Retaining a Trust
It is useful to remember the reasons why a Trust may have been established in the first place.
Achieving testamentary wishes
There are a number of Acts of Parliament which confer rights of claim upon persons for whom testamentary provision is not made e.g. the Family Protection Act 1955 and the Law Reform (Testamentary Promises) Act 1949.
All such claims are limited to the deceased's estate. If assets are put into a Trust then they are ring-fenced and cannot be attacked.
Relationship Property
A Trust protects assets which would otherwise be subject to a claim in the event of a relationship breakdown. This applies not only to the parties establishing the Trust but also to their children.
Creditor Protection
Assets held by a Trust will not be subject to claims by creditors (except for various claw back provisions). This is particularly relevant for children of people who have established a Trust.
Income Protection
Income earned by a Trust can be distributed to a beneficiary and is then taxed at the beneficiary’s income tax rate.
Summary
It is important proper professional advice is obtained before any steps are taken to complete a gifting process. This will normally involve both the accountant and the solicitor acting for the Trust. Where the eligibility for the Rest Home Subsidy is an important consideration, then particular care needs to be taken.