infosheet

on Gift Duty

HOW THE ABOLITION OF GIFT DUTY AFFECTS YOU AND YOUR FAMILY

Since 1 October 2011, gifts over $27,500.00 will no longer attract gift duty. This decision has particular relevance for those looking to set up trusts or those looking to gift the rest of the trust assets to their current Trust.

What is Gifting?

When a trust is created, the trust does not usually have enough money to buy assets from those who set it up, the “settlors”. Therefore, the trust enters into a Deed of Acknowledgement of Debt which allows assets (property, higher value personal contents and certain investments) to be transferred or “purchased” by a personal trust. In turn, the trust then owes a debt to the settlors, and the debt is “forgiven” by the settlors through a process of “gifting”.

How does the Abolition of Gift Duty affect your Family Trust?

·  Gifting prior to 1 October 2011 was done at the rate of $27,500.00 per annum per settlor to avoid gift duty tax, however this has now been abolished;

·  The balance of any existing debts can now be forgiven instantly with no gift duty;

·  Additional assets may be transferred to an existing trust with less formality and paperwork, again with no gift duty; and

·  New trusts can be established on more modern terms to allow for new assets to be sold to the trust with no debt back or gift duty implications.

The need for caution:

Although the abolition of gift duty makes gifting to a trust more flexible, there are still complex issues which need to be handled carefully.

Factors you need to consider:

1.  Should your trust have a gifting programme?

2.  For what should that gifting programme be designed? (e.g. Which assets and how much to gift)

3.  Is your trust structure, including your gifting programme, done in accordance with regulations and to your best interest?

The abolition of gift duty does not mean that gifting is suitable for every circumstance. Also, gifts that are not of a genuine nature will not be accepted.

How to optimise your trust and avoid complications

Income Tax Implications

While a trust may mitigate your taxes - a trust and the new gifting programme cannot be used to avoid paying taxes. For example, your trust cannot be used to dilute income and decrease taxable earnings and tax rate. You are also required do a formal valuation of assets to be held in trust.

Credit Protection

The trust cannot also be used to protect assets in the case of bankruptcy. Before making any gift, the donor’s solvency must be determined. The Property Law Act and the Insolvency Act give creditors protection and includes the ability to “claw back” the gifts. Creditors can also make a claim to assets gifted to a trust within two years of bankruptcy.

Placing Assets into a Trust

The rules defining beneficiaries and forgiveness of debts are still the same. This means that the beneficiaries must be those for whom the creditor has “natural love and affection” and are not charities. If beneficiaries are deemed inappropriate, the government may “claw back” these gifts.

Relationship Property

Trusts cannot be used to hide assets from a spouse or partner if they are entitled to a share under the Property (Relationships) Act. A spouse or partner that is entitled can seek compensation if the transferring of the assets was to defeat his / her interests.

Residential Care Subsidy

To be entitled to residential care subsidy, Work and Income New Zealand (WINZ) tests an applicant’s income and assets of the last 5 years. WINZ has the discretion to look at assets gifted to a trust as a part of this test so you must be careful not to prejudice your entitlements to residential care subsidies by gifting.

Trusts with Commercial Property

Different considerations come into play for trusts that own commercial property. Often the trustee may find that they have provided guarantees to the bank utilising the trustee assets and gifting these assets may mean a breach of covenant to the bank as one may suddenly become technically insolvent and an inadvertent breach may have occurred.

Our Recommendation

We can review your trust to make sure that it meets legal requirements while still meeting your goals. We can also determine whether a gifting programme is suitable for your current situation.

Contacts:

If you have a trust related dispute or would like more information on trust law, please contact Ross Dillon, Consultant ( / 09 970 8813), John Jon, Associate ( / 09 970 88296) or Tina Hwang, solicitor ( / 09 970 8812).

Disclaimer:

We have taken every care to ensure that the information given is accurate, however it is intended for general guidance only and it should not be relied upon in individual cases. Professional advice should always be sought before any decision or action is taken.

Queen City Law

Level 8, 203 Queen Street
P O Box 6908, Wellesley Street
DX CP24080
Telephone: 09 970 8810
Facsimile: 09 970 8820