Get your head around gifting

The obligation to pay gift duty on gifts made after October 2011 has been abolished although gift duty legislation is still on the books.

That leaves the question of what to do with all those gifting programmes that were underway to transfer assets to a trust.

Many gifting programmes have been discontinued in the belief that gifting is no longer required. The legal effect is that the debts are still owed to the extent that they have not been gifted away.

The options are:

  • Complete the gifting programme with one last final gift of the balance of debt
  • Continue the gifting programme at some level
  • Leave the debt as still due and owing
  • Some combination of the above.

But opting for one may leave you exposed to unintended consequences in another area.

Gifting programmes are generally set up to transfer assets to a family trust and therefore this discussion will centre around that.

Issues to consider

It is important to consider the purpose for which the original gifting was established. Usually it is to:

  • Guard against possible future insolvency
  • Position the donor to be able to claim a residential care subsidy (or other state benefit) later in life
  • Fend off future claims under the Property (Relationships) Act
  • Defend possible claims against the estate under the Family Protection Act and testamentary promises claims
  • Claiming other state benefits such as legal aid.

Read on to learn more about each of these.

Insolvency

The self-employed and those who have professional obligations that leave them open to attack often seek to protect their assets from creditor claims.

It is of course, too late to transfer assets to a trust when insolvency is looming. Gifts made within 2 years prior to insolvency can be clawed back by the official assignee. Gifts made between 2 to 5 years before bankruptcy can also be overturned if the donor was unable to pay their debts at the time of the gift.

In addition assets that are gifted away before entering into a business may be attacked under the Property Law Act if the assets were disposed of with the intention to defeat creditors. This has to be read subject to the rider of whether the debtor was able to pay their due debts at the time of the gift without recourse to the assets gifted.

So simply gifting assets before going into business may not achieve the intended result.

Residential Care subsidies

There is a misguided belief that simply gifting assets to a trust will position the donor to claim a care subsidy later in life. This is invariably not the case and great caution needs to be taken if that is the sole purpose of entering into a gifting arrangement.

Social Welfare have wide powers to determine whether someone has deprived themselves of assets or income for the purposes of qualifying for a benefit. They can look as far back as they like without limit.

So trust arrangements with associated gifting set up 20 or 30 years previously will be caught if that was the intention.

The big problem is that MSD can and do from time to time, change their policy on how they look at gifting. It is now established by the Court of Appeal that they can assess the application for care subsidy according to the rules that apply at the time of the application, not the rules that applied when the gifting was made. It is irrelevant that at the time the gifting was made it may have been within MSD guidelines.

With increasing costs of health care it is easy to see that MSD will adopt ever more restrictive rules. It would be unwise therefore to attempt to divest oneself of assets for some future benefit when it is impossible to predict what the future rules will be.

MSD also do not accept the same gifting rules as the IRD used to. For example IRD allowed gifts of $27,000 per person per year. So, couples could gift $54,000 p.a.

MSD will only accept gifting of:

  • In the 5 years prior to making an application for a rest home subsidy, they will accept gifts of only $6,000 p.a.
  • more than 5 years before an application is made to them for a subsidy they will accept $27,000 p.a.

But this is assessed over a couple not per person.

So a gifting programme that continues at $27,000 p.a. per person will only be recognised as to $6,000 for the couple for the last 5 years and $13,500 per year for every year before that.

Effectively a large part of the gifting programme will not be recognised by MSD (so those assets will be deemed to be still in the donors name). If no gifting has been made at all in the last 5 years then MSD will not allow any “back dated” gifting to occur.

One needs to consider carefully whether to continue gifting and at what level.

Property Relationship Claims

Once an asset is deemed to be relationship property then it is probably too late to transfer it into a trust as it can be clawed back under section 44 or 44C of the Property (Relationships) Act.

If it becomes necessary to transfer relationship property then a section 21 relationship property agreement will be required so the affected partner can be fully advised and authorise its transfer.

The best time to transfer assets is well before the relationship commences or is even contemplated.

If the assets to be transferred are separate property of the donor then any debt back from the trust will also be separate property. But in this situation it is probably wise to make an outright gift of the whole of the assets.

Family Protection Claims and Testamentary Promises

  • Family protection claims are where a member of the family makes a claim against the deceased party’s estate on the basis that the deceased owed them a legal duty to provide for them upon his/her death.
  • Testamentary promises are when the deceased promised them a certain share of the estate or a bequest often in return for some services during the deceased’s lifetime.

Such claims can be avoided by ensuring that the assets are gifted during the deceased’s lifetime. Once he/she is dead the court can revisit the will and effectively re-write it but it is much more difficult for the court to reverse gifts to a trust after the donor has died.

But this can create a problem for the donor while they are still alive. If he makes a gift and forgives it immediately he may have a problem if the trustees refuse to make provision for him out of trust assets at some later time when such assistance is required.

To avoid this the donor may feel more comfortable in lending the money/assets to the trust and not gifting away the resulting debt. Then in the event of trustees not making payments from the trust, the donor can simply call up the debt and regain access to the asset/funds.

State Claims

The State is probably the biggest creditor most of us will have, whether it is the IRD, WINZ or other agencies such as legal aid. The latter is not a gift but a loan and attempts to divest oneself of assets will probably be met with a challenge by the Legal Services Office.

Conclusion

Whether to make a complete gift or retain some control is dictated by the donors circumstances and their primary objective. It can be seen that a gifting regime to satisfy one objective such as divesting oneself of assets by outright gift to avoid creditor claims from a business operation, may create a problem if the donor later needs to claim for a residential care subsidy and did not have the correct gifting program in place.

It is important to work out what your primary objectives are before establishing a gifting programme.

 

The above advice is necessarily a brief over view of some of the main issues. It does not mention all the applicable law. You must take legal advice that is tailored to your specific circumstances before making any decisions.

How can we help you?

Contact us at the Border Law office in Clevedon  by phone on 09 292 8103 or send us an enquiry now.

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