Articles by The Professional Trustee Team
Well the New Year has well and truly started for us. In Trust Land we've conducted hundreds of Annual Trustee Meetings. Out of those ATMs we found a common issue arose – gifting. So I thought I'd talk a little about gifting and hopefully remove all the confusion.
- You as the Donor (the person making the gift) will sign a Deed of Partial Forgiveness of Debt and Gift Statements;
- The Trustees as Donees (the people accepting the gift) also sign the Deed of Partial Forgiveness of Debt and a Trustee Resolution noting on behalf of the Trust their acceptance of the gift;
- A copy of the Deed of Partial Forgiveness of Debt and the original Gift Statements are filed with the Inland Revenue Department;
- The Inland Revenue Department stamps the Gift Statements and returns them to the person who prepared the documents; and
- The stamped Gift Statements should be filed with the Trust's papers and the Trustee Resolutions accepting the gift should be filed in the Trust's Resolution Book.
Some people try to shortcut this process and only have the donor sign the gifting documents. I think this is a dangerous practice as I believe you should be able to show that a gift has been made and accepted.
Each time you gift you transfer in more wealth to your trust and you transfer wealth away from yourself. Hence if a creditor attacks you personally and all the assets are in the trust, those assets should be protected.
This means that should anyone bring a successful legal claim against you, they will not be able to satisfy their judgment against your personal assets as you will not own any assets of significance. Rather, it will be the trust that will hold all the assets and all the wealth.
Of course having said the above, you cannot transfer assets to the trust to avoid creditors that are already on the horizon. Additionally, the correct transfer process that I have previously discussed must have been undertaken. Most importantly, the administration of the trust must have been carried out correctly.
There are two problems I frequently see in practice. The first involves no gifting and the second involves incorrect gifting.
People often believe that once they have completed their first gift they either don't have to gift anymore, or that their gifting will happen automatically. They are usually wrong on both counts.
If a credit balance is owed to you by the trust, you need to keep gifting until that balance is eliminated. You also need to ensure that someone actually completes the gifting process. Often this will be a professional trustee.
If you do have a professional trustee you should ensure they prepare your gifting documents for you. They may, for example, think one of your other advisors is taking care of this. They may even forget. Accordingly, your gifting may become overlooked. To avoid this, simply diary out your gifting date and call your professional trustee or whoever is completing your gifting documents and prompt them.
Incorrect gifting is the second issue that can arise. This can occur when financial statements are not prepared and financial statement reviews are not completed.
Simply put, what happens when this issue arises is the balance recorded in the Deed of Acknowledgment of Debt that the gifting is based on, is not congruent with the balance noted in the financial statements.
This incongruence arises for different reasons, often because the trust has given back funds to the settlors. Accordingly, the credit balance owed to the settlors is less than that shown in the previous year's gifting documents.
When financial statements are not prepared and the annual financial statement reviews are not completed, the issue never becomes identified and lays dormant. Identification only occurs when an individual or a trust is questioned or attacked. That's when the problem is highlighted and comes home to roost.
Of course this can be avoided if you make sure the professional trustee does their job and ensures annual financial statements are prepared and carries out that all-important annual financial statement review.
I hope the above shines some light on gifting. As you can see, it's a really important part of gaining asset protection and has to be completed correctly.
Failing to have your Deeds of Acknowledgment of Debt contain the all important Hawkins and Entrenchment clauses can undo all the good work gifting brings about. Not gifting from the correct balances recorded in financial statements just creates havoc with the gifting programme. Taking short cuts with the preparation of the gifting documents themselves doesn't pay.
So if you are going to set up a trust and put assets into it to gain asset protection, take care to correctly complete your gifting.
Hi Matt, I have just attended the property school and just want to say it was really a worthwhile experience doing it especially for me who is planning to start as an investor (or trader). Thanks again for sharing your invaluable knowledge. P.S. Have also told my friends/colleagues, who are also interested on property, to attend the next property seminar. Best regards, - Brian
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