Articles by Matthew Gilligan

To Gift or Not to Gift

Many of you will be aware that the Government have changed the rules on gift duty, repealing gift duty legislation from 1 October 2011.  The effect of this is that IRD will no longer have an interest in gifts made after this date, as the transference of wealth will no longer be subject to gift duty from this point.

The question then raises itself, should people who have a Family Trust whom have been conducting a gifting programme make a lump sum gift to their Family Trust after this date?  The answer to this question is not as obvious as it may seem.  From an asset protection perspective clearly one would like to make a lump sum gift to their Family Trust for creditor protection in the future.  If a person has gifted all of their assets to a Trust, this means that they no longer have assets and in theory makes it much harder for creditors to get the assets from their Family Trust.  Previous restrictions on gifting having been wiped away from a gift duty perspective would make it seem obvious that lump sum gifts to a Trust would be the logical path to take from 1 October 2011.

Significant Issue to Consider before Gifting

One significant issue to consider is your eligibility in the future for the residential care subsidy.  The Ministry of Social Development (MSD) administer the asset and income testing rules.  In particular, it is the MSD that determine how discretion in relation to adding back past gifting into the asset test is applied.  Current policy of the MSD is that all gifts within 5 years of applying for the subsidy are added back, with the exception of an allowance on $6,000 per annum.  In other words, if you gift all of your assets to a trust and then 1 year later require rest home the gifting will be added back and included in your asset base.  The MSD can also reverse gifts outside the 5 year period, but at this point current policy is to only add back any gift in any year exceeding the sum of $27,000.

For example let us look at an individual who had an outstanding loan balance from their Family Trust of $500,000 and on 1 October 2011 declared a gift to their Trustees for the $500,000 as a one off gift.  While IRD would have no interest in such gift and it would not be taxable under gift duty legislation thereafter abolished, the MSD perhaps 40 years later (or whenever it was that the person making the gift made application for the residential care subsidy on the basis that they had no wealth at that time because all of their assets were contained in Trust) would look back and say that on 1 October 2011, the applicant had made a gift in excess of $27,000 and add back $473,000 to the applicant's personal asset base.  In other words while the $27,000 gifting threshold is no longer relevant to IRD, it is still highly relevant in relation to your ability to claim aged care subsidy relief in the future.  In this case the $473,000 deemed available to pay rest home fees.  On the other hand the $473,000 would not be available for aged care fees had the person continued to gift at a rate $27,000 per annum.  In this instance, each year there would be no gift over $27,000 so no excess to add back. 

On the face of it, you may think it is therefore best to continue to gift at a rate of $27,000 per annum.  In some cases we would agree with this conclusion.  However, it will not be appropriate in all cases.  If the assets base is big enough that no amount of annual gifts at $27,000 per annum will see you fall below the asset threshold, then there is little point persisting with gifting at $27,000 per annum.  Second, if you are more concerned about creditor protection and having assets outside of your estate (i.e. so they are not subject to a challenge to the will) then you will want to do a one off gift.  Third, if it is going to be many years before eligibility for residential care is an issue, we consider it unlikely that the rules will be the same in, say, 30 years.  Following this, it may be an ultimately fruitless exercise to gift at $27,000 for 30 years only to arrive at the end and be subject to a different set of rules.

Solvency At Time Of Gift Important To Document

The other issue that needs addressing particularly if you are making a one off gift to the Trust is solvency.  In short there are provisions under the Insolvency Act (sections 194, 195, 204 and 205) which broadly speaking allow the Official Assignee to set aside certain transactions made by a bankrupt before he or she was adjudicated bankrupt.  Largely these provisions apply if gifting occurred within 5 years of bankruptcy at a time the donor was insolvent.  Furthermore, there are provisions in sections 344 to 350 of the Property Law Act that allow transactions that prejudice creditors to be clawed back.  As a result you need to be very careful when documenting large gifts to Trusts if you want to mitigate the possibility of such gifts being clawed back under either of these statutes in the future.

We consider that best practice is to ensure that your solvency is evidenced at the time that any gift is completed.  This means that a solvency statement or certificate should be executed at the time of the gift referring to the fact that the donor is able to meet debts as they fall due.  In some cases this should be a certificate signed off by an independent qualified party such as an accountant.  In some cases it might be a simpler declaration by the donor.

At GRA we will be reviewing the circumstances of all clients that we complete one off gifts for and making sure that there is evidence of solvency maintained for the file.

Summary

You should not rush into making a one off gift of assets into a trust post 1 October just because you can.  In some cases there will be grounds for completing your gifting programmes as you would have done under gift duty legislation at $27,000 per annum per year, per spouse, to maintain the option of qualifying for the residential care subsidy under current MSD rules.  On the other hand you need to weigh this against creditor protection and estate planning issues. 

To see me talk more about this in detail watch "The Beat Goes On."

If you would like to discuss this matter with the writer, please contact  Matthew Gilligan at Gilligan Rowe & Associates LP, mg@gra.co.nz, +649 522-7955.

Matthew Gilligan
Director

Contact Matthew at mg@gra.co.nz
or call +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.  Also what about joining us on Facebook.

GIFT DUTY TO BE ABOLISHED
On Monday Revenue Minister Peter Dunn confirmed that the government intends to abolish gift duty.  Earlier this year the Minister had signalled that a review was being undertaken as to whether or not the gift duty regime should be repealed or amended.  Subsequently that review has occurred with the Inland Revenue producing a report assessing the impact of a repeal of gift duty across other governmental and legislative areas.  One of the prime concerns that was raised when the review was announced earlier in the year was whether or not repealing gift duty would have an adverse affect on creditor protection and rules in relation to qualification for social assistance. Contact Us at GRA.

The Review

The outcome of this review is that the various governmental bodies have concluded that there is little or no risk to their areas of operation if gift duty were to be repealed.  The Inland Revenue have confirmed that approximately $1m of revenue is collected annually in terms of gift duty.  Interestingly they note that much of that revenue collection seems to be a result of timing mistakes where donors accidentally gift more than the $27,000 allowable in the 12 month timeframe.

From our perspective the areas that we were most interested in was whether a repeal of the gift duty regime would lead to any suggestions for new legislation in respect of creditor protection or access to social assistance such as residential care subsidies, family assistance, student allowances etc.  In short the review has concluded that existing legislation is adequate and no changes are proposed as a result. 

As a result of the above legislation is to be introduced later this month which will see gift duty abolished from 1 October 2011. 

The Outcome

Overall we see this as positive development for taxpayers.  Abolishing gift duty will reduce compliance costs in that those of you that have outstanding gifting programmes will be able to bring those to an end post 1 October 2011 and thereafter not have to worry about the annual gifting process.  We also think it is encouraging that rules in relation to eligibility for residential care subsidies for example are not proposed to be altered so that there is at least some degree of certainty as to how those will apply.

What Should You Do Now?

The obvious question that arises out of this is – what do you do if you have annual gifting due between now and 1 October 2011.  Although it depends on the circumstances, in general we recommend that gifting continues as usual. 

Certainly we note that any transfers of assets to Trust prior to 1 October 2011 will still have to take place at market value with the usual sale and purchase agreement and deeds of acknowledgement of debt in place.  Gift duty still applies up until that date so still needs to be dealt with.  In terms of forgiving any outstanding debt our inclination is to encourage our clients to continue to execute gifts between now and then on the basis legislative provisions in terms of the creditor clawback apply such that gifting inside certain time frames is automatically reversed.  Thus the sooner a gift is executed the sooner it falls outside the timeframe.  We also note that until the legislation is drafted and passed into law there is always the prospect of it being amended or altered although we do see this as likely.

Summary

In summary, when transferring assets to a Trust at present it is business as usual at this point as gift duty will apply if the assets are not transferred at market value so there still needs to be valuations, sale and purchase agreements and deeds of acknowledgement of debt in place.  If you are currently gifting and have a gift due in between now and 1 October 2011 we encourage you to complete that gift, particularly if it is in the immediate future.  Post 1 October 2011 we will be contacting clients with existing outstanding gifting programmes and putting in place documentation to bring those gifting programmes to an end. 

Please contact us at Gilligan Rowe with any queries in relation to the above by clicking HERE

Matthew Gilligan
Director

Learn More about Matthew
Contact Matthew at mg@gra.co.nz
or call +64 9 522 7955

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In case you missed it over the weekend, the NZ Herald article on a woman being awarded a share of her husband's 'inherited property' that pre-existed the relationship rewrote some relationship property rules.

What Happened?

The supreme court held that a woman whom helped maintain an inherited farm property (that pre-existed the marriage) was entitled to 40% of the growth on the property that occurred during the relationship.

Why?

Because she contributed to the maintenance of the house by performing domestic chores and by earning income.

Why is this a change ?

It was generally accepted before this case that inherited property that pre-existed a marriage is separate relationship property and not subject to 50/50 split on divorce.

Comment;

• Personally I think the case is fair, - she did contribute to the relationship so why should it not be shared property, given she contributed to the properties upkeep? The plaintiff's counsel noted the farm would have likely been forced to be sold, but for her income being used to support bank payments.

•  If you wish to avoid this happening, - put your property in a Trust and ask your spouse to sign a relationship property agreement. The latter ( relationship property agreement or S21 agreement) makes it very clear that the property is not intended to be joint relationship property. Such agreement is much easier than an expensive fight later on, and perhaps easier to put in place earlier than later.

•  The Trust is a great thing to do before the relationship commences, but is weakened as a defence to a claim if setup during the marriage and the property is transferred during the relationship. If you wish to do this during the marriage, the S21 agreement is essential to stop spouses 'tracing' their potential relationship property interest into the Trust.

Thank you,

 Matthew Gilligan
Director

Learn More about Matthew
Contact Matthew at mg@gra.co.nz or call +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

As accountants we are often asked, what can we do to manage our exposure of our affairs to banks, as we increase our business or property borrowing?

There are lots of things you can do to reduce the effectiveness of bank securities and protect yourself from the banks. Ultimately the goal is to stop them taking everything, - just allow a bank to take the investments (and equity in them) that you allot them security over.

Gearing Rules Of Banks

You will need to work within their gearing rules to achieve what is discussed below - so as background generally banks will be happy if you have a 20% deposit on residential property, or 33% deposit for large or commercial investors. Of course you need cashflow to support the credit application, and interest cover of 2.5 to 3 is also required in NZ, rule of thumb. ( Interest cover is rent+ income / interest expense).

Strategies include to beat bank securities (stop them getting everything if you are insolvent):-

1 Use a 'Split loan structure'

Use two banks: Bank 1 lends to the LAQC, secured by the rental, and personal guarantee(PG); the other bank ( bank 2) provides the deposit secured by the family Trust asset. As soon as you can, revalue the rental and refinance with bank 2 to remove bank 1. You end up 100% financed with no Trust guarantee.

2 Put your home in a Trust

Obviously put your home in a Family Trust and complete a gifting programme. Don't give bank 2 a security over the Trust. They will ask, say no. If you do not put your home in a Trust, your personal guarantee exposes the home to bank 2.

3 Use a 'Hawkins Clause'

While you are conducting a gifting programme, if you go bankrupt you will have the ungifted loan called upon to be repaid from the Trust by bank 2. The process is bank 2 calls your PG ( because your company has failed and lost money leaving the bank unsatisfied, etc); the bank demands you pay - you don't and they apply to the court to bankrupt you; the official assignee examines your assets and finds the ungifted loan balance - and will call upon trustees to pay it out in full.

So to defeat a claim against an ungifted loan to your Trust, put a Hawkins clause and debt entrenchment clause in your deed of acknowledgment of debt. The former makes says the OA cannot call the loan, if you are bankrupted ( effectively) and the latter says if the loan is called ( say the clause is struck out at court of appeal, as our clause has high court support in case law), then you leave the remaining loan balance subject to a call notice of 8 years, slowing down the OA for that time.

Watch the video below for an explanation of the Hawkins Clause.

 4 Use the GRA one one one rule, being

* One company ( LAQC ) ( or Trust or whatever you are investing in)

* One bank

* One million dollars worth of debt

By doing this you quarantine all of the banks from each other; if one entity ends up in trouble with a bank, you do not lose all of your property at once - because the banks are ring fenced off from each other in separate companies. This gives you a timing advantage if you end up in a scrape with say bank one, because you can be moving the assets in company 2/3/4 etc and they will have no control over the assets.

It is all about what I call 'getting positional advantage' on a bank. IE Getting to a position where they do not have your entire life stitched up, so they can destroy your family and life savings if something goes wrong.

Strategy 5 No Spouse Guarantee

Don't give a banker your wife's or husbands guarantee. Only one of you should be a director and guarantor. Negotiate HARD to avoid both spouses giving guarantees.

We have more information on property structures and family trusts on this website as well as our family trust blog a www.familytrusts.co.nz.

In summary, you make it really hard for the banks, and they tend to give up. Do nothing and allow them to cross secure everything - you will lose the lot.

Try to ring fence them and manage them with a good broker, - you will be in a much stronger position if you have problems, and you should be able to defend your family home and contents of your Trust.

We have for years told people to do the above, and their brokers, and lawyers have said we are over complicating it, just allow cross securing. Well that is and was crap advice, and many clients are in trouble because they were led into short cuts by their lawyers or brokers.

Split loans take a bit of time to set up, and a bit more energy on your broker's part, - but they are really really effective in a recession. Problem is, in a recession, they are really really hard to put in place ! ( for weaker borrowers.)

Last point: you need a broker to do this - the banks will not want you to do it. Its not illegal, but no bank will help you defeat their interests with split loan structures - they will discourage it and say don't do it. Of course - that is best for them.

I hope this information has been useful.  For a free review of your financial affairs including how to best structure your assets, please request a call now.  We're here to help.

Til next time,