Gift duty is no longer payable for gifts made after 1 October 2011. As a consequence, the $27,000 per annum duty free gift limit will no longer apply – gifts of any amount can be made without attracting gift duty.However, before you make your next gift there are a number of matters we strongly recommend you consider. It may not necessarily be the case that gifting everything at once is best for your specific circumstances. Matters to be considered include the impact of gifts in relation to:
- the Ministry of Social Development’s residential care subsidy;
- claims from creditors;
- who the gift is being made to – the Income Tax accrual rules;
- retaining control of your trust;
- bequests under your will(s); and
- Look Through Companies.
Residential care subsidy
Should you (or your partner) require full time care in the future, you may wish to apply for a residential care subsidy to help with the costs of care. You will then need to undertake a financial means assessment, the first limb of which is an asset based test:
For a single person
You may have assets up to the value of $210,000 and still be eligible for a residential care subsidy.For a couple
You may have assets up to the combined value of $210,000, or your home and car plus further assets to the combined value of $115,000, and still be eligible for a residential care subsidy.
Impact of gifting by Single person
In the five years before the financial means assessment, you are permitted to make $6,000 worth of gifts per year. Gifts made prior to the five years before making the application may be to the value of $27,000 per year. Gifts over these values will be counted back as assets into your financial means assessment.
Impact of gifting by a Couple
In the five years before the financial means assessment, you are permitted to make $6,000 worth of combined gifts per year. Gifts made prior to the five years before making the application may be to the combined value of $27,000 per year. Gifts over these values will be counted back as assets into your financial means assessment. This may mean that even under your existing gifting programme with each of you gifting $27,000, $27,000 worth of your joint gifts may be counted back per year into your asset assessment.
The Ministry of Social Development has confirmed to us that no spreading of the $27,000 gifts will be permitted. If a gift of more than $27,000 is made in one year, it will not be offset in later years. For example, of a $100,000 gift made in 2011, $73,000 will be counted back in to the asset assessment should the applicant apply for a subsidy in 2020, even if no further gifts were made during the years 2012-2020.
If you are a couple, gifting the family home into a trust may not be appropriate. Should you gift your home in one year, the value of your home will be counted back into your financial means assessment. However, as noted above, if you leave your home in your personal names, the value of your home may be excluded from the financial means assessment.
Social welfare policy is endeavouring to ensure that placing yourself in a position of being entitled to a residential care subsidy through placing your assets into a trust will become increasingly difficult. If, due to the value of your assets which remain to be gifted, there is very little likelihood that a residential care subsidy will be available in the future, it may be appropriate to make large one-off gifts. If you want to continue with gifts of $27,000 each year, an accurate document trail needs to be maintained and annual accounts should be completed by an accountant (whether the trust is earning an income or not) as further confirmation that the gifts actually took place each year.
Please note that the current residential care subsidy policy may change before you are in a position to make application for a subsidy.
If you have creditors who may be put at risk as a result of you making a gift, your gift may be clawed back. This can happen in a variety of circumstances, particularly under the Property Law Act 2007 and Insolvency Act 2006.
To ensure that your gifts will not be clawed back, it is important that your gift is made long before there is any hint of financial difficulty on your part or before you agree to a financial obligation. No matter what your financial status is, should you be in business, a borrower, or a guarantor of any borrowings, we strongly advise that when making a gift after 1 October 2011 you complete a solvency statement. The solvency statement should be reviewed by your accountant.
Where a gift is contemplated to clear a debt owed, the gift should only be to persons for whom you are likely to be considered to have natural love and affection. The beneficiaries of the trust should fall into this category if the debt is being forgiven to a trust. If not, financial arrangement rules (accrual rules) may apply, giving rise to income tax, for example, on distributions from family trusts in the future.
Control over trust
It is important to remember that once you successfully complete your gifting the asset (debt) no longer exists. Should you wish a trust asset to be sold and a new asset purchased, or should you need to deal with the asset in the future, for example to sell a property and purchase a new property, the trustees will be the only ones able to do this.
A person who is owed a debt from a trust naturally has some control over that trust. Depending on the terms of the agreement under which the loan was originally made, if you are owed a debt from the trust you will likely have the ability to increase the interest rate of the debt or make a call on the debt. By forgiving the debt, you will lose this element of control.
This is particularly important should your personal interests conflict with the interests of the trustees. For example, if your adult child is trustee of your trust, it may be best for you to keep a debt back owing to you which you can call upon, rather than relying on the discretion of your child. If you decide to retain some of the debt, the repayment terms of the debt may need to be altered.
Bequests under your will(s)
If you have made specific bequests in your will(s) it is important to ensure that there will be sufficient funds in your estate to meet such bequests. If all of your personal assets have been gifted into a trust, there will be little in your estate to distribute. We recommend that at least, you should retain debts owing to you by the trust sufficient to meet any such bequests in your will(s).
Look through company
The Look Through Company (LTC) superseded the Loss Attributing Qualifying Company (LAQC) in April 2011. If a company is a LTC, shareholders may deduct company losses from their personal income in proportion to the extent of their investment in the LTC. A shareholder’s investment in the LTC includes any debts the LTC owes to the shareholder, or any of the LTC’s debts which the shareholder is guarantor for. Before forgiving any debts where a LTC is involved, it is important to test how it may impact on the shareholder’s ability to deduct losses from the shareholder’s personal income.
Despite all the above points, there may still be good reasons why you will want to make a substantial gift now. If you are satisfied that none of the above issues are relevant for you, and you do not believe they will become relevant to you in the future, you may wish to avoid the hassle and expense of yearly gifting programmes. Further, there may be the following benefits in relation to estate protection and relationship property matters and cost:
By gifting your assets into a trust now, there will be fewer assets in your estate on your death. As a result there will be fewer assets which could be disputed by persons who believe they have an entitlement to your estate different to that set out in your will. It is usually much more difficult to claim an entitlement against a discretionary trust than it is to claim against a deceased person’s estate.
A substantial gift of assets into a trust or clearing a debt balance owed to you by a trust, may make it easier to protect those assets from relationship property claims. The balance of a debt owing to you by your family trust is still an asset in your name which may be susceptible to a relationship property claim.
Making one gift now to clear the balance owed to you by your family trust may remove the need for gifting in future years and as a consequence avoid ongoing annual fees for gifting documentation.
Depending on your assessment of the matters detailed above, when you gift in the future the following documentation may need to be completed:
- Deed of reduction or repayment of gift, or deed of gift
- Trustees’ minute
- Solvency statement
We note that any principal and interest payments you are making under any loan in the name of the trust after 1 October 2011 will be direct gifts to the trust. Preferably, these payments should be recorded in a deed of gift. At the least, they should be recorded annually in a minute.
Commentators on the new gifting regime all strongly suggest completion of solvency statements in an endeavour to ensure that gifts will not be subject to attack or question in the future. Should your circumstances be such that creditors would likely question your gift in the future, it would be appropriate to have your solvency statement verified by your accountant.
For further information, personalised to your circumstances, please contact Tony Fortune, Lauren Corbett or Katherine McCarthy.