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Slash Your Taxes: One-Off Gifting

It’s not long until 1 October 2011 when gift duty will be scrapped. The big question everyone’s asking is whether to make that big one-off gift to forgive all your debt in one go. Well, as always in life there are pros and cons.

The pros first:

  • It is often easier for disappointed beneficiaries to establish a claim against wills/estates than against the trustees of a discretionary trust. It would be sensible to extinguish the debt so that potential claimants against your estate are not able to access the debt back, which is an asset of the estate.
  • Relationship Property claims often focus on the debt back from the family trust. If there is no debt back, Property Relationship Act claims against the trust are that much harder. This could be very important in the future but you don’t know it yet!
  • It’ll save the fees paid to your lawyer or accountant for the annual gifting rigmarole.

On the other hand:

  • The debt is an asset for the lenders and often it is used as a means by which to control the trust. Once the debt is forgiven you lose the most effective way to control the trust. This can particularly apply to loans by parents to trusts for their children.
  • A one-off forgiveness of debt will not necessarily give rise to any added advantages in terms of entitlement to rest-home subsidies or other WINZ benefits. The rules only allow a certain level of gifts for the five years preceding the application (currently $6,000 p.a.), and for periods beyond that at only $27,000 per year. If there is a one-off gift, all but the annual exemption amounts will be clawed back in the calculation. This suggests it may well be appropriate to continue with a regular gifting programme if WINZ considerations are going to be relevant to the client in the future. If you are under 60 I wouldn’t worry about this one!
  • Insolvency and the timing of any debt forgiveness is relevant. Case law and the Insolvency Act may mean that full information of your financial position is required and it may be appropriate for you to ask your accountants to provide a solvency certificate at the time of any one-off forgiveness of debt. Again for most of us not an issue.
  • If you are the shareholders in a Look Through Company (“LTC”) a potential issue arises with the shareholders forgiving the debt owed to you by the trust, where the trustees are also guaranteeing the debt. Forgiveness of the debt can affect your “equity” and lead to the application of the loss limitation rule whereby you are not able to claim all of the losses arising from the LTC.

The cons above are the ones all the experts have been saying. However, in my opinion the biggest issue is how you can best still benefit from your trust if you can’t draw upon your settler debt. Other than be allocated beneficiary income, you could loan monies from the trust (assuming the Trustees and Trust Deed permit this) but I’ve never been sure about this – who knows in the future if the IRD will tax such loans and probably already will treat as income for Working for Families Tax Credits?

So the big decision – do you leave $50,000 or $100,000 of the debt outstanding just in case? You never know when it may come in useful and if you lost it through a claim, yes it would be upsetting, but it wouldn’t change your life, would it?

If you need help to decide whether to make a one-off gift of your settler debt contact Nick on 0800 ASK NICK or email nick@abac.co.nz.