Trusts – Be Wary of Over Gifting

On the first of October, gift duty will cease to exist. Some may say “This is great as I can simply gift all my assets over to my trust and they will be out of reach of creditors, disillusioned partners, and government agencies for benefit means testing”.

Unfortunately, it is not as simple as all that. Like life in general, there are consequences for every action that you take. The reality is that there are relatively few trusts where there is the need for protection against creditors and potential claimants. This situation would mainly apply to people who own business, or provide advice. Those people providing advice in a professional capacity should have professional indemnity insurance in place to cover potential claims.

One of the real issues that trustees need to address is when beneficiaries who often are the settlors, use the trust as if the assets belong to them. Often this is by not attempting to maintain the capital value of the trust. Simply, beneficiaries often draw down capital as well as the income that the trust is making. This becomes a real issue, when the settlors have completed their gifting program to the trust. To overcome this, it may be prudent for the gifting program not to be completed, so that the trust retains a debt to the settlors. One of the dangers of doing away with gift duty is that settlors may simply gift away the remaining debt that the trust owes them, and forget about the longer term consequences of what happens when they need the trust to provide for them in retirement.

Why has gift duty been abolished after having been around for 125 years? The reason is because it is costing IRD too much to administer. The IRD claims that it costs them $430,000 in administration fees to collect one million dollars of gift duty. More interesting is that the IRD estimates that it will cost professionals such as accountants and lawyers, around $70 million in lost compliance costs revenues.

Gifting away your assets to a trust is no guarantee that they are safeguarded. You need to make sure that the trust is under the control of all trustees and administered correctly to avoid being challenged as a sham. There is always the potential for former partners and creditors to challenge a gift where it has disadvantaged their claims against the donor. Means and income tested benefits can readily “look through” trusts. If you are depriving yourself of income for example, WINZ can adjust any benefit accordingly.

The real test relating to the abolition of gift duties will no doubt occur sooner or later in the courts. Until there is some case law, we suggest that settlors should take a prudent approach to their gifting, and it may be beneficial to seek professional advice from a lawyer who specialises in estate planning.

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.