Some years ago, you transferred your farm to your family trust. The trust didn’t have any money to pay you for it, so you loaned the money to the trust. You have been forgiving $27,000 of the loan each year to avoid gift duty, but now that gift duty has been abolished, you are wondering whether you should forgive the whole of the remaining debt in one go?
There are a number of reasons why you should think very carefully before deciding whether to give away the remaining debt in one go.
Rest home care subsidies
The Ministry of Social Development (previously WINZ) will continue to apply a means test to anyone who applies for a residential care subsidy. It can refuse to pay a subsidy if:
a. You or your spouse/partner have made gifts totalling more than $6,000 a year in the last 5 years before applying for the subsidy; or
b. You or your spouse/partner have made gifts at any time more than 5 years before applying and those gifts total more $27,000 in any year (i.e. $13,500 each).
This could cause serious problems if a couple have given away everything to a trust and have no cash to pay for rest home care, and do not qualify under the rules for a subsidy.
Creditors
If someone becomes bankrupt, the Official Assignee can cancel any gift that the bankrupt made within 2 years of the date that the person was made bankrupt.
The Official Assignee also has the power to cancel any gift that a bankrupt made between 2 and 5 years before the person was made bankrupt if that person was unable to pay his or her debts at the time the gift was made. It is up to the person who received the gift to prove that the bankrupt was solvent at the time that the gift was made.
Also, the Property Law Act 2007 allows the Courts to set aside any transfers of property which ”prejudice” creditors.
If you do want to make a substantial gift to your trust, it may be wise to first ask your accountant to give you a solvency statement which states that you were solvent at the time.
Relationship property claims
The Property (Relationships) Act 1976 allows a Court to order that compensation be paid by one spouse to the other if the first spouse’s or partner’s rights to relationship property have been defeated by the transfer of the property to a trust. The court can also order that trust income be paid to that spouse or partner. To avoid these types of claim, consideration should be given to establishing a trust before a relationship begins, and to signing a relationship property agreement.
Income tax
Unless you have natural love and affection for the person who receives a gift, the recipient will have to pay income tax on the gift (including any debt that is forgiven). You are allowed to have natural love and affection for the beneficiaries of a trust, if those beneficiaries are your spouse, children, grandchildren etc., but if you can’t have natural love and affection for the beneficiaries, you may be creating a tax problem if you gift.
Other
There may be other reasons why you may not want to gift everything. If you give away everything and have no personal assets, you may find it hard to get a credit rating and to borrow money. Also, you may not want to have to consult with the trustees every time you need to access funds for some purpose. Also, if you have children from a previous relationship, you may want to set aside funds for them rather than leaving that to the discretion of the trustees.
Conclusion
You shouldn’t jump in and gift the whole debt to the trust, just because you can now that gift duty is gone. You should think carefully about whether that is a good idea in your particular case, or whether you should continue with an annual gifting programme.