Pitfalls of generosity

By Nathaniel Heslopm, Wynyard Wood Lawyers and Notaries

Most people are familiar with family trusts, gift programmes and estate planning, but there can be pitfalls when these arrangements are not administered correctly. From 1 October last year, you no longer have to pay any gift duty when making a gift by cash or by transfer of assets. It is now possible to transfer an entire asset into a trust in a single transaction, or if you are part way through a gifting programme, to ‘gift-off’ the balance of the debt owed by a family trust.

Although the law as it relates to gift duty has changed, other parts of the law remain unchanged and can trap people in an unintended or unforeseen way. The abolition of gift duty is likely to result in larger gifts being made, and the consequences of not considering all the effects increase accordingly. The appropriateness of forgiving a debt, in whole or in part, or of making a gift will depend on the circumstances of each individual.

Trusts are coming under attack more regularly in the following areas:

● By creditors challenging gifts to a trust when they can show that, at the time a donor makes a gift, the donor is unable to pay their debts as they fall due, or the personal liabilities of the donor exceed their personal assets. If you believe you are at risk of a creditor claim and engaged in a gifting programme, you may need to obtain a solvency certificate each time you make a gift.

● Non-trading family trusts are not required to submit financial statements other than to trustees and beneficiaries. A trusts activities can, however, be examined by various agencies or challenged by a disgruntled beneficiary. Properly recording trustee actions and decisions is important to refute any future challenges.

● The Ministry of Social Development can look back at the entire gifting history of a trust. Your entitlement to a residential care subsidy may be affected if you have gifted more than $6000 per year. A failure to consider the impact gifting may have on your entitlement to assistance may jeopardise arrangements made from the commencement of the trust.

Gifting is a personal matter and will be different for each donor and recipient. Care must be taken to ensure that unintended and unforeseen consequences do not eventuate. More than ever it is important to discuss the consequences of gifting with your accountant or legal advisor.

Published 18 January 2012