The Facts about the abolition of gifting If you have a family trust and are currently on a gifting programme then you need to read this article carefully!
Traditionally, the annual gifting programme has provided an opportunity for clients to turn their mind to the administration of their trust on a fairly regular basis. With the new proposed new rules, the need for vigilance in keeping track of assets settled upon the trust and noting of advances or debts that have been advanced or repaid will be of upmost importance. Records and documentation may become the subject of careful scrutiny by interested parties and trustees will need to ensure that the records they have will hold up to such scrutiny.
You need to keep in mind however that irrespective of the law change, there will still be the need for the usual documentation to establish the debt (being the Deed of Acknowledgement of Debt) and then to forgive the debt (via the Deed of Gift). The difference under the proposed new law is that this forgiveness may be for the full amount of the debt, rather than $27,000.00 per person.
It will be important that any restructuring be well thought out with there being no rush to complete the restructure during October.
Some of those consequences included the loss of absolute control of the assets; the need to ensure that trusts are under the control of all trustees and administered correctly to avoid being challenged as a sham; the potential for former partners and creditors to challenge a gift where it has disadvantaged their claims against the donor; and any tax consequences of the disposition, such as depreciation being recovered.
Another area to consider is that the Ministry of Social Development have set out the current criteria that will be applicable for any application of a Residential Care Subsidy. In plain English a Residential Care Subsidy is a subsidy paid by the Government in eventuality you require rest home care.
The Ministry of Social Development have reiterated that gift duty is to be abolished on 1 October 2011 and although this is a change to duty law, there is to be no change to social security law. The limits on allowable gifts for the Residential Care Subsidy are not changing.
This means that if you were hoping to gift the balance of the debt due by your Family Trust on 1 October 2011 then any excess over $27,000.00 will be treated as an asset as far as the Ministry of Social Development is concerned should you have to apply for an Residential Care Subsidy in the future. The amount of the gift that exceeds the limit of $27,000.00 will not be depleted with the lapse of time.
In essence if you wish to avoid asset testing you cannot gift more than $27,000.00 in a 12 month period. This situation remains.
It should not be assumed from the law change that in every case a person should gift away the entire debt owing to him or her. Whether to gift or not involves balancing the need, on one hand, to have recourse by right to the assets in the trust against, on the other hand, the exposure to creditor protection, relationship property and succession claims. For some it may only be appropriate to forgive a portion of the debt owed. People may feel that it is desirable to have recourse to the assets of the trust without the need to rely on the goodwill or agreement of the trustees by simply being able to demand repayment from the Trust as
and when required. On the other hand, asset protection via a trust has always been somewhat undermined by the debt that remained outstanding to the person who transferred the assets to the Trust. This debt back could be vulnerable to attack by creditors and the proposed new law does provide the opportunity to forgive this debt in full immediately, rather than gradually
You must also keep in mind that the settling of assets onto a trust will still need to be made at market value to ensure that there is no element of under-value transfers. Valuations can be used to establish the market value of assets.
Posted on Mon, 1 August 2011
by Shawn O'Grady