GIFTING – THE PROs & CONs by Atticus Legal, Hamilton Lawyers
Gift duty was abolished on 1 October 2011. But gifting still presents thorny issues, especially for older people and those with a family trust. Good legal advice is essential to navigate through the issues involved. At Atticus Legal, Hamilton Lawyers we know gifting inside out.
Gifting can occur in a number of different contexts, for example:
i. Parents assisting children with the purchase of their first home;
ii. To gift away assets during your lifetime with the purpose of defeating anticipated claims against your estate when you die (i.e. ‘estate planning’); and
iii. To gift assets to a family trust during your lifetime (or when you die).
(i) Gifts to children
Parents sometimes gift amounts to their children, for example to assist them to buy their first home. However, a gift can not be revoked – i.e. you can not insist that it be paid back. The risk here is that your child and their spouse/de facto partner may end up separating, so that the spouse/partner will still have the benefit of the gift.
Parents should instead consider recording it as a loan (often interest-free) to their child and his/her spouse/partner, usually recorded in a deed of acknowledgement of debt signed by both of them. The effect of this is that, if a separation occurs, you can at least call for repayment of half of the loan from your child’s spouse/partner.
Sometimes the bank making a home loan to your child and their spouse/partner will insist that your contribution be recorded as a gift, rather than a loan. But this requirement by banks is becoming less common. If you can record it as a loan, then you should do so. At Atticus Legal, Hamilton Lawyers we’ve never heard a client say “I wish I had not documented that loan”.
(ii) Estate planning
You are legally free to gift away during your lifetime as much of your assets as you wish. You may wish to help out your children before they inherit on your death. Or in some circumstances people consider it is likely that there will be a claim against their estate when they die (e.g. by a child who has been ‘left out’ of your will). In these circumstances, for estate planning purposes, you may consider it appropriate to gift away substantial assets during your lifetime, for example to children or other extended family, causing your estate assets to be relatively low when you die. Gifts during your lifetime can not be challenged by anyone contesting your will. However, see below re gifting restrictions on qualifying for Residential Care Subsidy.
(iii) Family trusts
Prior to the abolition of gift duty, people who transferred assets to a family trust were constrained by the maximum gift duty–free allowance of $27,000 per person per annum. At Atticus Legal, Hamilton Lawyers our experience was that the usual formula for transferring assets (e.g. the family home) to a trust was that they were sold at market value to the trust and the trust owed a debt back to the settlors of the trust (i.e. the sellers of the asset) equal to the market value of the asset concerned. Before abolition of gift duty the settlors would then gift off (i.e. forgive) that debt as to $27,000 per annum per settlor. So in the case of a couple they could gift off that debt owed by the trust, free of gift duty, at a combined total of $54,000 per annum.
While the debt (or the balance of it) remained by the trust the debt (not yet forgiven) was an asset in the names of the settlors. Those who set up the trust mainly to ‘ring fence’ say, their family home from business creditors had an incentive to gift off the trust debt as soon as possible. Why? Because while the trust debt remained owing to the settlor, if a creditor forced the settlor into bankruptcy then the Official Assignee (who administers bankruptcies) could call up the ‘settlor debt’ and recover it from the trust (for the benefit of your creditors).
Now in the absence of gift duty, the timing of the gifting and the financial position of the settlors at the time of the gift can still have consequences in a bankruptcy of one or both of the settlors. If the settlor who later becomes bankrupt was insolvent at the time of each gift concerned then the Official Assignee can ‘claw back’ such ‘voidable gifts’ made prior to bankruptcy, within certain time limits. That is, the Official Assignee can effectively set aside such gifts and, standing in the shoes of the bankrupt, make demand on the trust for payment of the debt.
Flexibility on transfer of assets to & debt back from a trust
Even if the risk of bankruptcy is not an issue (e.g. you are not trading in business and have no exposure to trade creditors), it is sometimes felt that the settlors should not during their lifetimes gift off the whole of the debt owed by a trust, but rather leave some debt which can be called up from the trust if circumstances required.
Sometimes the main purpose for setting up a trust is not ring-fencing of assets from business creditors, but instead as part of ‘estate planning’. For example, parents may be concerned that one or more of their children may in future separate from their spouses/partners in circumstances where if the child receives an inheritance from your estate then it may become relationship property which that child’s spouse/partner may make a claim against.
The above can be avoided by the parents setting up a family trust during their lifetimes but without transferring/gifting any assets to it, thereby avoiding falling foul of the below-mentioned gifting restrictions regarding Residential Care Subsidy. Instead, the parents will put in place wills which state that all or most of their estate goes to the family trust (when the parents die). In this way the children can have the benefit of the trust assets after you die without necessarily having those trust assets in their own names. If they separate from their spouse/partner then those trust assets are protected.
The above strategy is sometimes used where parents have particular concerns about their childrens’ relationships and/or where the parents have a level of assets which would take too long to gift away before potentially qualifying for Residential Care Subsidy (and staying within the gifting restrictions relating to Residential care Subsidy).
Consequences for Residential Care Subsidy
The knee-jerk reaction to abolition of gift duty has sometimes been for settlors of a trust to immediately entirely forgive and release all debt owed to them by the trust in a one-off gift. However, depending on the age of the settlors, at Atticus Legal, Hamilton Lawyers we recommend that they should first consider what implications this may have for any future application for Residential Care Subsidy.
The Ministry of Social Development (MSD) has relevant policies in regard to criteria for applicants to qualify for Residential Care Subsidy. Residential Care Subsidy (‘RCS’) is a means-tested payment for certain basic-level residential care costs where you require rest home care. Obviously this is most relevant to older people, but younger people should also have an eye towards these future issues when structuring their affairs. The MSD policies and requirements extend back for an indefinite period, so it is not just the elderly who need to take this into consideration.
Rest home care is expensive (at least $60,000 per annum) so if you are trying to preserve your estate for your children then the RCS rules need your careful attention.
The MSD policies currently in place may well change over time. So this article relates only to the MSD rules as they currently stand.
MSD assesses people as to their need for rest home care. WINZ applies the policies regarding RCS applications. Each applicant for RCS must complete a detailed application which includes information as to gifts made during your lifetime (without any specific limit as to how far back this disclosure must go). As part of the RCS application WINZ can look back indefinitely to determine whether or not you have made any gifts which effectively reduce your financial resources. WINZ are looking for any attempt to divest yourself of assets with a view to coming within the allowable asset thresholds for RCS. If WINZ determines that you have ‘deprived’ yourself of assets then it may require you to contribute your own resources (or say, your family trust’s resources) towards your rest home costs before you become eligible for RCS.
Asset thresholds for Residential Care Subsidy and ‘allowable gifting’
Entitlement to RCS is both asset-tested and income-tested. While your spouse/partner is living in the family home, the asset threshold is either:
i. The value of the family home plus (combined as a couple) other assets of $124,379; or
ii. Total combined assets of $227,125 (including the value of the family home, if any).
In the case of a single person (e.g. where you spouse/partner has passed away or is already living in a rest home) the allowable asset threshold is item (ii) above only.
In addition, WINZ applies certain ‘allowable gifting’ limits to help determine whether you have deprived yourself of assets. This has nothing to do with gift duty (now abolished) – it only relates to policy regarding applications for RCS. The maximum ‘allowable gifting’ by a couple (or individual) during the 5 years prior to the application for RCS is $6,000 per annum. In respect of periods before (i.e. outside of) that 5 year period, the maximum allowable annual gifting is $27,000 per couple (not per individual). Any gifting outside of those allowed limits may be regarded as ‘deprivation of assets’ and may disentitle you or delay your entitlement to RCS.
Nevertheless, even though in principle WINZ may look back as far as it wishes, at Atticus Legal, Hamilton Lawyers we believe that common sense would indicate that if a person/couple made a substantial one-off gift to their trust in their 20’s or 30’s then it is unlikely to later disentitle them to RCS. However, if such a gift in excess of the WINZ ‘allowable gifting’ was made by someone in say, their 60’s or 70’s then clearly this could be problematic.
So, has gift duty gone? Yes. Are there other consequences of gifting? Yes, and ‘it depends’. At Atticus Legal, Hamilton Lawyers we have the answers to all your questions regarding gifting.
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This information sheet is copyright ©Atticus Legal, June 2018