On 1 October 2011, gift duty was abolished. You now have the freedom to transfer assets and forgive debts without having to think about gift duty and filing gift statements. And it will no longer take a lifetime of gifting to transfer assets to your family trust.
The abolition of gift duty provides a perfect opportunity for you to review your asset plan to make sure that it meets your objectives. You may want to:
- Complete your gifting programme to clear debt owed by your existing family trust, and transfer additional assets to the trust
- Settle or resettle assets on a new trust
- Assess your options in relation to using trust or company structures (including look-through companies), or both
You should still ensure that gifts of assets and debt forgiveness are properly documented - supplemented by a certificate of solvency in appropriate circumstances. But now that gift duty is gone, gifting should be simpler and less costly to deal with.
And we note that if there were to be a change of Government, tax policy settings may well change - so now is the time to act.
But first, you need to think carefully about your asset planning objectives, taking into account the issues outlined below. You should also get advice that is tailored to your circumstances.
FAMILY TRUST ARRANGEMENTS
Many of you will have existing trusts to which assets can now be transferred free of gift duty. There may also be debt owed to you in relation to the past sale of assets to the trust, and you can now choose to:
- Forgive the debt in full
- Progressively forgive the debt
- Leave the debt outstanding
Deciding on the best option for you and your family will depend on your asset planning objectives and your financial position, taking into account the issues outlined below.
The same issues will need to be taken into account if you are thinking about transferring additional assets to your trust, or settling or resettling assets on a new trust.
Using Trusts to Administer and Protect Assets
The family trust continues to provide a useful structure to:
- Administer assets for the benefit of you and your family, and any other potential beneficiaries (including charities).
- Protect assets from claims by personal creditors (subject to our further comments below) and claims made against your estate.
It is a well-established and flexible structure for achieving these objectives (although in some cases, or for some assets, a trading trust or company structure may be more appropriate).
Family trust arrangements allow you to deal with assets for the benefit of your family during your lifetime, rather than keeping them in your own name and ultimately leaving them to be dealt with as part of your estate under your will. Your trust arrangements and your will should be considered together - as part of your overall asset plan.
Because assets held in trust are not part of your estate, they are currently protected from claims against your estate by family members under the Family Protection Act. Similarly, they are protected from any "testamentary promise" claim by a person alleging that you promised to provide for them out of your estate for services performed for you.
Tax Treatment of Trusts
The family trust may also be a tax-efficient option for meeting your other objectives, with the flexibility of having trust income taxed as either trustee income or beneficiary income.
The tax rate for trustee income is, however, now aligned with the top personal tax rate at 33% and the tax implications of using a trust to hold assets, and in particular income-earning assets, should be compared with other options. For example, a company structure (including a look-through company), now subject to tax at company level at 28%, might be a viable alternative.
The recent, high profile Supreme Court decision in Penny & Hooper, where IRD successfully attacked the diversion of personal services income through company-plus-trust structures to achieve tax savings, also warrants caution – but it by no means precludes the appropriate use of such structures to meet your asset planning objectives.
ASSET TRANSFERS AND DEBT FORGIVENESS - ISSUES TO CONSIDER
You no longer need to think about gift duty. But there are a number of other issues for you to be aware of in relation to gifting assets to, and forgiving debt owed by, your family trust (or any other potential recipient of such gifts).
Remaining as a Creditor
You can be directly involved in your family trust's administration as a trustee and/or as the person having the power to appoint and remove trustees and beneficiaries. You may also have an interest as one of the discretionary beneficiaries of the trust.
In some circumstances, however, it may also be advantageous for you to remain as a creditor of your trust to provide an additional degree of leverage - provided that remaining as a creditor (retaining the debt owed to you as a personal asset) does not undermine your other asset planning objectives.
Potential Tax Issues
Income tax issues still need to be considered in relation to asset transfers and forgiveness of debt. For example, you need to be sure that debt forgiveness is for "natural love and affection" under the terms of the financial arrangement rules in the Income Tax Act. You should also be aware that forgiveness of debt can give rise to income tax issues for the trust under those rules in the future, when subsequent trust distributions are made.
Care will also need to be taken in relation to the tax implications of transferring certain assets, for example shares in a company, or land that may be subject to the income tax rules that tax profits on land sales.
Personal Guarantees and Solvency
If you have given a personal guarantee, for example to your bank, you will need to ensure that the gifting of assets or forgiveness of debt does not deplete your assets so that you are in breach of your obligations under the guarantee.
Gifts may also be vulnerable to attack by creditors and/or the Official Assignee seeking to claw back assets, or the value of assets, that you have disposed of:
- Under the Property Law Act, recent changes have lowered the bar for creditors. If it can be shown that you disposed of your assets with intent to prejudice a creditor or by way of gift, the asset transfer or debt forgiveness may be set aside. To be successful the creditor does have additional hurdles to jump, but it is important to note that there are no time limits on claw-back under the Act.
- Under the Insolvency Act, if a person is declared bankrupt then any gifts made within two years prior to the date of bankruptcy may be clawed back by the Official Assignee. Any gifts made between 2 and 5 years prior to the date of bankruptcy may also be clawed back by the Official Assignee, if the bankrupt was unable to pay his or her debts at the time of the gift.
If you are in any doubt as to your solvency when transferring assets or forgiving debt, we would recommend completing a certificate of solvency.
Relationship Property Issues
Asset transfers and forgiveness of debt in favour of a trust should not be viewed as a ready means of defeating a spouse or partner's rights under the Property (Relationships) Act.
The Act includes specific "trust busting" provisions, although in some cases these provisions are ineffective. The Courts in dealing with relationship property disputes have increasingly resorted to other means to enable spouses and partners to access assets transferred to a trust and/or to have rights in relation to the trust. It is very likely that there will be more litigation in this area to reclaim relationship property that has been transferred to trusts.
It is important that asset planning arrangements, including trust structures, are flexible enough to deal with the potential for relationship break-ups and to avoid Court intervention. It is also important that spouses and partners seek appropriate advice before transferring any property to trusts.
Residential Care and Other Means-tested Assistance
The transfer of assets to a trust also should not be viewed as a ready means of avoiding means testing for residential care assistance; indeed, under current rules you could be in a better position to qualify for assistance if you and your partner own your own home rather than having transferred it to a trust. The Ministry of Social Development also has significant discretion to modify the rules in this area to deal with the avoidance of means testing through the use of trusts and other structures.
The impact of increased asset transfers to trusts following the abolition of gift duty on residential care assistance and other policies that rely on means testing is likely to be closely scrutinised. Changes are likely to be made if considered necessary to preserve the integrity of such policies.
The abolition of gift duty provides a perfect opportunity for you to review your asset plan.