Blindly gifting may not be in the best interests

It has been suggested that if something is said often enough, it becomes the truth/norm. This article is to offer an alternative view to a theory currently being espoused in many social and business settings around town.

A case in point: I recently overheard a fellow professional boldly declaring that everyone should automatically forgive their total loan balances to their trust on October 1 (the date on which gift duty is to be abolished). He also said that if you did not already have a trust, you should set up a trust and gift all your assets on October 1.

While some may see the removal of gift duty as a chance to defeat creditors and gain access to social benefits by depriving individuals of ownership of assets by gifting them to a trust, it may not be the total godsend solution that it appears at first blush.

Don't get me wrong; there are many reasons for considering the transfer of property into a trust, but it should not be seen as a blanket solution to life's ills/risks, and doing such should be a decision made within a wider context.

For example, on face value, residential care subsidies seemed to be one area where the removal of gift duty could have had a significant impact. However, the existing rules more than adequately cover this situation and prevent an undue advantage being obtained.

At present, gifts made within five years of applying for a residential care subsidy in excess of $6000 per application per annum, will be clawed back. "Application" can include a spouse. Thus, a husband and wife can gift no more than $6000 in total per annum if they wish to avoid clawback. If a couple together gift $54,000 per year, their excess gift over five years would amount to $240,000.

Beyond that five-year period, it is possible to gift up to $27,000 per application per annum, but anything more than $27,000 could also be clawed back.

Someone can be paid for providing a high level of care before going into a rest-home. However, any such amount will be included in the total gifting allowance (of $6000 per annum for five years) and, therefore, may affect the clawback calculation.

Furthermore, the rules also claw back any deprivation of property and income. Deprivation is where there is a deliberate act or omission that results in deprivation of property or income. Deprivation of income includes waiving a right to income, not demanding payment, or investing in low-income producing assets.

Why go into all this detail on such a small point? Simply to illustrate that the decision to gift is not as clear-cut as you may think. And this is without even considering various legislative provisions protecting creditors and (soon-to-be ex) spouses, nor the impact of debt forgiveness to family trusts may have on the tax treatment of some future distributions (such may result in extra tax costs).

It is my view that blindly gifting all of one's assets/debts on October 1 will not be in the best interests of all. Before engaging in gifting or transferring assets to a trust or other person, you should consider the wider implications of doing so, including application of the above rules, matters like loss of control, family succession objectives, income needs, consistency with wills etc. It is always wise to seek quality advice before undertaking any gifting.

Scott Mason, is the tax principal at WHK in Dunedin.

 

 

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