Many of you will be familiar with the yearly forgiveness of part of the debt owed by a family trust to you. For a long time now this has been carried out at the rate of $27,000 per year per person – because any more gifting by a person in a year than this attracted the dreaded gift duty (no one paid it as a result, but if you had to, you would NOT have been happy).
In reviewing the law, the government has concluded that gift duty is to go the same way as the late and unlamented stamp duty – because (in their opinion) it is a tax that brings in far less than its compliance cost justifies.
We are not quite so sure as to whether the two situations are analogous. The benefit of the gift duty was not so much in what it collected, but what it stopped – large scale gifting of millions of dollars from one entity to the next that, two to five years down the track, would be irrecoverable. Nevertheless the government in its wisdom has decided that the benefits of removing the gift duty compliance regime outweigh the possible detriments and from October 2011 it will be open slather.
It seems to us that this is a godsend for the unscrupulous businessmen of NZ. Mark Bryers would have loved it. There are bankrupts (or ones that ought to be bankrupt) up and down the country that would have killed for the opportunity to gift everything away and have it untouchable 2-5 years down the track.
Several clients have asked us whether, in the interim, they should continue with their normal gifting programme. Gifting usually attracts a legal charge of around $300 plus GST – is it worth it?
Our view is that clients should strongly consider continuing their normal gifting programme up until, say, around June/July 2011. The primary reason is that the date of gifting starts the clock running on any clawback of gifts, and we are still in a less than healthy economy.
What this means in practice is that come October 2011 you will be able to gift, in one lump sum, the remaining amounts owed to you by your trusts. We expect that October will be a very busy one for Legal Executives throughout the country, following which they may be tempted to hang up their gifting boots for good…..but should they?
Let’s add a few cautionary notes, as being owed money by the family trust can sometimes be a good thing rather than bad. For many people, who naturally have well-run trusts operating as properly independent third parties, the debt owed to them via the trust is important leverage. It can also be used to allow the trust to transfer assets back to you in reduction or satisfaction of the debt. Using trust income to repay debt can be very tax efficient.
Factors that influence your decision will largely be based around your level of potential exposure to creditors. It may be that there is a big difference in this regard between spouses, so that it makes sense for one partner (who is, say, not exposed for the other partner’s business debt) to retain a large debt to them by the trust while the other gifts off their portion. But in that event, you will have to think about the potential unbalancing effect should you and your spouse end up separating. It is all a matter of degree.
Give us a call to talk through the issues on 09 921 5026 or email me on firstname.lastname@example.org. Mention up front that you read this blog and the initial talk is free.