Gift Duty

GIFT DUTY

As you may be aware, gift duty was abolished from 1 October 2011.

From that date, any gifts made will not attract gift duty.

This will particularly affect those people who have Trusts and who have been involved in gifting programmes.

However, although the abolition of gift duty will appear to present attractive options for people in these circumstances, they should consider carefully the implications of deviating from existing gifting programmes and making large one off gifts as there are considerable implications.

1. Creditors

A large one off gift may potentially attract the attention of creditors.

Annual gifts of $27,000 involve a slow and steady progression.

A large one off gift may, potentially, create a technical insolvency if the donor has other creditors.

If, as the result of a gift, the donor is unable to pay his or her debts as they fall due, the donor could face a claim by the creditor to claw back the gift.

Provision exist under the Property Law Act 2007 for the Court to claw back gifts made by a debtor who was insolvent at the time of the disposition, or became so by the disposition, with the intention to defeat a creditor.

Similar considerations would apply if the donor was about to enter into business.

Under the Insolvency Act, the Official Assignee is able to claw back gifts made within two years before the date of the debtors adjudication in bankruptcy and between two and five years before the date of adjudication, if the bankrupt was unable to pay his or her debts at the time the gift was made.

Careful consideration needs to be given to asset levels if a large one off gift is proposed and, ideally, a Solvency Certificate would be completed to establish that the making of the gift would not detract from the donor’s financial position.

2. Relationship Property Claims

A large one off gift to a Trust may have a considerable effect on a relationship property claim in the event of a separation.

If relationship property is transferred to a Trust, the resulting debt owing back from the Trust is itself relationship property.

The Trust property itself is no longer the property of either party to the relationship and cannot be relationship property.

In the event of a future separation, a partner could be detrimentally affected by the gift having been made.

3. Tax Implications

There will be tax implications for the Trust in the event of a Forgiveness of Debt in favour of a Trust unless the only beneficiaries of the Trust are those for whom the donor has "natural love and affection", or charities.

Gifts of assets in respect of which depreciation has been claimed also have the potential to create a tax liability.

4. Rest Home Subsidies

The rules are complex and there are implications created by gifting, and particularly, large one off gifts.

The rules clearly now being enforced are that you pay for your own care until your assets drop to the threshold levels.

If any potential donor has aspirations to obtain a rest home subsidy then they must think very carefully about the position before making a large one off gift.

5. Wills

Property gifted ceases to be part of a deceased persons estate.

There are estate planning opportunities created by the ability now to make large gifts.

The result of all of this is that care is needed.

In many cases, large on off gifts might appropriately be made, but before doing so, the matters raised above should be considered.

A gift, once made, is irreversible.

In particular, if there are rest home subsidy issues underlying a gifting programme, then it is most important that advice be given about the effect of any large one off gift. Because the criteria around rest home subsidies is complicated, we suggest you refer any issues to either David Farnsworth, Anissa Bain or Dallas Woods.

In addition, and with the likely increase in activity in these areas, trusts affected are bound to come under scrutiny from disaffected parties! It will become imperative that trust administration is properly done and documented in order to withstand any challenge in the future.

Please let us know if you would like any help with the issues raised in this letter.

David Farnsworth
Partner
DDI: 03 545 6716
Email: david.farnsworth@pittandmoore.co.nz