Although gift duty has been abolished and it is no longer a requirement for gifting documents to be filed with the Inland Revenue Department, it is still necessary to properly record and document any gifts that are made. Unless this is done, if you have been carrying out a gifting programme, any balance left owing to you is considered to be a personal asset.
Although you can now gift any amount without attracting gift duty, there are consequences that donors (people making a gift) need to keep in mind when considering the amounts they wish to gift, such as:
If you gift away your assets, they are no longer your personal assets over which you have control. There may be circumstances where you still want your trust to owe you money so that you can ask for repayment in the future.
You may wish to consider retaining control over some of your assets. If your trust continues to owe you money, you are able to access it in the future by asking for that money to be repaid. Therefore, it may be best not to gift all the debt owed to you.
Before deciding to make a significant gift to your trust or to family, you should think about what your own needs may be in the future.
A debt owed to you by a trust is a personal asset and it may be prudent to forgive the debt to protect that asset from potential claims by creditors.
The ability to gift unlimited amounts at any time provides donors with a greater degree of creditor protection than before. Donors should be aware, however, that any gifts made with the intention to defeat creditors could be set aside at any time under the Property Law Act 2007.
Prior to making a gift, you need to consider whether or not you are solvent. If you are solvent, you can pay your debts as they fall due for payment.
If you make a gift when you are insolvent, or if you become insolvent as a result of making the gift, the gift could be challenged and possibly clawed back by your personal creditors.
Ideally, before making any significant gift, you should obtain a solvency certificate from your accountant confirming that you are solvent, so that it can be produced as evidence that you were solvent, if required.
This is an important consideration if you want to protect assets from personal creditors.
You may wish to gift assets direct to a trust or forgive a debt owed to you by a trust so that these do not form part of relationship property. Generally property transferred to a trust prior to the commencement of a relationship is not likely to be at risk in the event that a subsequent relationship breaks up. However, if you are in a relationship, you should consider whether such a gift could be challenged by your partner in the future.
If one partner has transferred relationship property to a trust with the intention of defeating the other partner’s rights to the property, this may be challenged and set aside.
Gifts should only be made to persons for whom you have “natural love and affection”, such as your children or parents, or to a trust which has beneficiaries for whom you have “natural love and affection”. No income tax would be payable in these situations.
If you make a gift to someone outside this category, such as a company, income tax would be payable under the “financial arrangement” rules in the Income Tax Act.
Despite the changes to gift duty, the eligibility requirements relating to asset-tested Government benefits remain the same.
For instance, if you require rest home care and wish to apply for a rest home subsidy to assist with payment for your care, you will need to undertake a financial assessment. One of the criteria for a means assessment is that donors do not deprive themselves of assets for the purposes of qualifying for a residential care subsidy.
Making gifts over specified amounts may be considered as depriving yourself of income or property.
To ensure that any gifts you make will be below the limits required to maintain eligibility for such benefits, it may be prudent to continue with, or establish, a conservative gifting programme, rather than making a single large gift, There is still no guarantee, however, that you will be eligible for a subsidy.
The effect of making large gifts should be considered in relation to estate planning, as these can have a significant impact on your overall estate plan. For instance, if you make large gifts during your lifetime, there may not be enough assets after your death to provide for beneficiaries under your will.
It is wise to discuss your overall goals with your lawyer and accountant to assess how best to achieve them. For further information, or to discuss your personal situation, please contact our special trusts team.