Gift duty was abolished on 1 October 2011. Many clients are asking us to gift the balance owing to them by their trust in one hit. Their motivation for this varies.
One reason is that Government “user pays” charges mean that it is better not to have assets owing to you in your own name.
Other clients just want to save the annual costs of an ongoing gifting programme.
Nothing is so straightforward. Each person must consider the benefits of:
- Completing a gifting programme all at once;
- Continuing with progressive gifts as in the past, or
- Not gifting at all.
The abolition of gift duty is a tax change. It is not a change to social policy.
WINZ will continue assessing entitlements to rest home subsidies. WINZ only allows gifts of $6,000.00 for the five years before the application. Before that, only gifts of $27,000.00 per year are allowed.
If you want to be eligible for a rest home subsidy, then you are best to continue with an ongoing gifting programme of $27,000.00 per year. That way you will stay in tune with WINZ current policy for assessing entitlement to a rest home subsidy.
If you have no hope of meeting the WINZ requirements, or if you have other priorities with your asset planning goals, then it may be appropriate to consider a one off gift.
This could apply to an individual who has formed a trust but still holds considerable wealth either in the form of a debt owing from the trust or from other assets not yet transferred to the trust. In this case, it may well be advisable to make a one off gift to the trust as protection against a potential relationship property claim. A partner may still challenge a one off gift if you were in a relationship at the time the gift was made.
The moral then is to ensure that everything of value is held by a trust with no significant debt back at the time you form a relationship.
As we all know, timing is everything. If you are concerned about the potential claims under the Family Protection Act or similar legislation, then you may prefer to have your assets transferred to a discretionary trust with a one off gift.
That way it is much more difficult for disappointed family members to have a successful claim against a family trust as opposed to claiming against a deceased estate where there were assets owned by the deceased personally.
Business owners who want to protect themselves from claims by creditors may think that a one off gift is a good tool for risk management. This is not necessarily so.
Insolvency and the timing of any debt forgiveness are relevant.
The Property Law Act and the Insolvency Act allow gifts to be “clawed back” for creditors in certain circumstances.
If you are self-employed, then full information of your financial position should be disclosed before making a gift.
With the way the law is developing, it is likely that all clients will be asked to produce a solvency certificate at the time of any one off forgiveness of debt. This will entail a detailed summary of your financial position, which clearly shows your assets and liabilities as well as any contingent liabilities including guarantees.
There are obvious implications if a one off gift is made, without taking into account personal guarantees, which could make the donor insolvent. This would effectively allow the gift to be set aside.
There are income tax and GST implications on making gifts in some instances. We recommend that, where business or income producing assets are involved, you first discuss the implications with your accountant. In most cases, it will still be advisable to transfer the asset at its full market value followed by an immediate gift of the sale price.
Before making a one off gift there are other tax provisions to be taken into account. For example, there could be adverse tax consequences if a gift is not made in favour of a beneficiary for whom the donor has “natural love and affection”. A company is not an entity for whom a donor can have natural love and affection in this context. If you gift to a trust, which includes members of your own family as beneficiaries, then generally they are held to be persons for whom you have natural love and affection.
So, what seems to be a much welcome law change does not take away the necessity for careful thought before deciding whether to continue with an annual gifting programme or to gift one large amount.
Some people should not gift at all. This is particularly where there are loans to family members. Even if loans are not intended to be claimed back, circumstances can change. It is desirable to have some control over the loans, such as in the case of the breakdown of a child’s relationship or simply where your financial circumstances have changed and you need the money back.
To state the obvious, once a gift is made there is no longer any loan owing to you and you lose the ability to claim it back.