Until 30 September 2011 under NZ tax law, an individual could only gift $27,000 per annum with out paying gift duty.  The most common process to transfer assets to a trust was to value the assets at market value and then sell them to the trust, taking back a loan.  This loan was then progressively gifted at the annual rate of $27,000.  It often took many years, or even a life time, to transfer all your assets to a trust without paying gift duty.

On 1 October 2011 NZ gift duty was abolished and now it is possible to gift all your assets to your trust immediately.  For people with existing gifting loans they can now complete one final Deed of Forgiveness of Debt for the entire amount of the loan owing by the trust.

For gifts made after October 2011 it is no longer necessary to file gift duty statements with Inland Revenue.  However, the appropriate documentation (usually a Deed of Forgiveness of Debt) is still required to record gifts to the Trust or other people for whom you have “natural love and affection”.

Gift duty has only been removed in instances where there is “natural love and affection”.  Under NZ law it is generally not possible to have natural love and affection for a company, so care is still required when dealing with incorporated entities. 

The question now is – should you gift all your assets to a trust? 

There are a number of important issues to consider before making a decision to make a large gift, including:

Once gifted, you are likely to have no entitlement to the assets of the trust  

In some cases you may want to retain the ungifted loan so that you can exert a level of control over the assets (for example to protect yourself in the event a relationship ending).

This can also be the case with loans by parents to trusts that have their children or grandchildren as final beneficiaries.

A one-off forgiveness of debt may affect eligibility for income and asset tested benefits

Current income and asset tested benefits include:

• Ministry of Social Development benefits
• State Housing
• Working for Families Tax credit
• Student Allowances
• Community Service Cards
• Child Support
• Legal Aid
• Residential Care Subsidy

The existing rest home subsidy rules only allow a certain level of gifts for the five years preceding application (currently $6,000 per annum), and for periods beyond 5 years at only $27,000 per year.  If only one spouse or partner is in care, the combined gifting as a couple must be below those limits.  If there is a large one-off gift, all but the annual exemption amounts will be clawed back in the calculation and there is currently no time bar.

Deprivation of assets by transferring assets to an associated person or your trust can still be added back for residential care subsidy calculations.  Similarly, legal aid has been declined for individuals with no assets in their personal name on the basis that an associated family trust owns assets exceeding the threshold for legal aid eligibility.

We understand that government agencies will be reviewing their various application forms for social assistance and specifically asking for disclosures of gifts made.  If WINZ considerations are important to you it may be appropriate to continue a regular gifting programme.   It is also possible that the rules and eligibility tests for social assistance will change in future.

Solvency and timing of any debt forgiveness is relevant

If by making a large one-off gift you become technically insolvent personally, then Section 346 of the Property Law Act, as well as the relevant sections of the Insolvency Act may be important. 

This may mean that the gift can be overturned by creditors or other interested parties at a later date.  For asset protection it is important you remain technically solvent at the time of making any one-off forgiveness of debt and that the intention of the gift was not to prejudice the interests of a creditor, de factor partner or spouse.

We expect that solvency certificates will become common, and possibly even a legal requirement, when making large gifts in the future.

“Owners basis” calculations for Look Through Companies (“LTC”) may be relevant 

If you are a shareholder in a Look Through Company (“LTC”) that makes losses then you need to take advice before gifting.  If by gifting you have “no assets at risk” this may mean that you will not be able to claim your full share of LTC losses against your other taxable income.

Existing law still provides for creditors and other interested parties to access trust assets in some situations

The Insolvency Act provides the official assignee with the power to cancel gifts made within two years before adjudication, or within five years if the bankrupt cannot demonstrate solvency at the time the gift was made.

The Companies Act provides the official assignee with similar powers but over shorter time frames (six months and two years respectively).

The Property Law Act enables the Court to set aside property dispositions where there was an intention to prejudice the interests of a creditor.  This provision has no time limit.

The Property (Relationships) Act provides the Courts with the power to set aside transfers of property to trusts where there has been the intention to defeat a spouse’s or partner’s claim at the time the disposition was made.  Even if the disposition was not intended to defeat a claim but had that effect, the Courts are able to grant compensation, including other non-trust assets or income of the trust.

The Family Proceedings Act allows the Court to vary the terms of an agreement or settlement made before or after a marriage or civil union, and this includes the ability for the Courts to vest part of a trust to an affected partner for their benefit.

In summary, good trust administration will continue to be important to protect your assets.  It will be critical that:
          ·  legal title to goods gifted has been updated,
          ·  you were solvent at the time of making any gifts,
          ·  there was no intention to defeat a claim against you, and
          ·  appropriate documentation and records are available.

Because there are so many aspects to consider before you make a large gift we recommend that you take professional advice before taking this step..