THE ABOLISHMENT OF GIFT DUTY
As most readers will be aware, the Government abolished gift duty in October 2011. That abolishment effectively means that a person can gift an unlimited amount of property amongst family members at any one time without incurring Government gift duty. Previously a person could only gift $27,000.00 per annum without incurring gift duty.
Whether it is beneficial for you to gift more than $27,000.00 at any one time to your Trust will depend on your own personal circumstances and your reasons for setting up the Trust in the first instance. The matters that you will need to consider are as follows:
- Your solvency and the possibility of claims against you by creditors immediately and in the future;
- Whether you might be gifting relationship property which could jeopardise a future claim;
- Whether you intend to apply for a residential care subsidy now or in the future;
Possible claims by creditors
If you intend to gift the total balance owing to you by the trustees of your Family Trust, you must be solvent on the date that you are making the gift. To satisfy a solvency test, you must be able to pay all debts as they fall due. If you make a gift when you are insolvent then it is possible for that gift to be reversed by a Court at any time. The effect of the Court reversing the gift will place you in a position where you could make payment of some or all of your debts.
Gifts to Trusts that defeat relationship property rights can be overturned by a Court. In some circumstances additional claims for financial losses might also be available to a party who has suffered a loss as a result of improper gifts. The safest course is for a trust to be formed, assets transferred to it and gifting to be completed prior to the commencement of a relationship. The transfer of assets into a Trust during the course of a relationship (this can include any forgiveness of debt), may be considered as a transfer of relationship property to the trust. In the event of a relationship breakdown, the trust might thereafter be open to a relationship property claim.
Residential Care Subsidy
When applying for a rest home subsidy, certain thresholds for ownership of assets for rest home subsidy, and thresholds for historical gifting, must not be breached. A rest home subsidy will likely be available where gifting of the amount of $27,000.00 per annum and $6,000.00 per annum during the five years immediately prior to your application for a subsidy. Any person who takes advantage of the repeal of gift duty to gift more than $27,000.00 in a 12 month period to a trust will be treated as having deprived themselves of assets. The Ministry of Social Development will add back excess gifting as an asset of the individual and on that basis the applicant may not qualify for a residential care subsidy.
Our broad recommendation is that gifting programmes should continue unchanged. In some instances, it will be beneficial for an individual to forgive and release outstanding debt provided that the solvency test can be met and there are no threatening creditors on the horizon. However, it is imperative that you discuss your specific personal circumstances with your solicitor prior to making any decisions on the forgiveness of outstanding debts.Let's chat