Any asset can be transferred to your family trust. However, it‘s generally
recommended that you only transfer assets which are likely to increase in value.
For most people this usually involves transferring their family home, and perhaps
rental property and some investments such as a share portfolio. Your lawyer can
discuss with you which assets should be considered.
If you’re considering transferring assets such as rental properties to your trust
you should talk with your accountant about the tax implications (including
depreciation write-back) of such a transfer.
When assets are transferred to a trust, they are effectively being given away.
The law requires that trust funds must be kept quite separate from your own
personal assets, therefore when you put anything into a trust it’s treated as
a gift.
The law now allows you to give away as much as you like at any time. The
previous gift duty or tax no longer applies (it was abolished in 2011). In some
circumstances, however, giving assets away can have adverse consequences.
There are three particular situations where it is particularly important to get
specific advice about how to go about transferring assets to a trust.
These are:
• Where there are potential relationship property claims
• If you are looking for protection against possible future creditors, and
• If you have concern about the cost of rest home care at some future time.
An application for a rest home subsidy is likely to be declined if you have given
away substantial amounts, whether to a trust or to anyone else. Under the
current rules, you may gift only $27,000 a year (reducing to $6,000 a year
during the five years before you apply for a subsidy). If only one spouse or
partner is in care, your combined gifting as a couple must be below those limits.
During the five year gifting period, if too much has been given in one year,
the gifts can be averaged over the following years to keep within the prescribed
limits. Gifting prior to that five year period cannot be averaged out, but it‘s
sometimes possible to reverse the transfer of assets in order to qualify for
a subsidy.
The rules are complex and the Ministry of Social Development has a stringent
regime of assessing whether or not you may have ‘deprived’ yourself of assets,
or income from assets. If you attempt to avoid payment of a rest home subsidy
by completing a single gift, it‘s unlikely to be effective.
In order to keep within the Ministry of Social Development’s limits, it's possible
to use what is known as a ‘gifting programme’. This usually involves:
• Selling assets to the trust at their full market value
• Leaving the amount of the ‘sale price’ owing as a debt, and
• Reducing that amount by a gift of $27,000 each year (per couple).
Of course these are all paper transactions; no money changes hands apart
from legal fees. It‘s important to keep full records of the sale, acknowledgement
of debt and annual gifting. There should also be records to establish the market
value of the assets, for example a report from a registered valuer (local council
rates assessments may not be a good guide). Your lawyer should prepare these
documents – sale, acknowledgement of debt and annual gifting – for you so
that you can be sure they are legally effective.
It’s possible to transfer an asset to a trust in
order to avoid the risk of a claim by a future spouse or partner. The law does,
however, allow ‘claw-back’ of an asset which has already become relationship
property or was transferred in order to defeat the rights of your spouse or
partner at the time.
While a gifting programme, spreading the transfer of the value of the assets over
a number of years as above, is sometimes recommended because of concerns
about rest home subsidies, using a gifting programme may have adverse results
if there is a claim by a spouse.
Widower John
John is a widower in his early 50s. He hopes to remarry eventually, but he also wants
to ensure that the property he and his late wife built up together is passed on to their
children in due course. He transfers all his property to a trust. As he is not yet in a
relationship, he can transfer everything outright. He is not intending to defeat the rights
of a spouse or partner – he doesn’t have one yet. So the claw-back rules in the Property
(Relationships) Act 1976 don't apply. Gifting spread over a longer period would be risky
because of the claw-back rules. John is better transferring everything immediately.
Trusts are often recommended if you need protection against possible claims
from creditors. There’s nothing wrong with putting assets in a trust if you
don’t have any liabilities at the time, or if you retain sufficient assets to meet
your potential liability. In this situation it makes sense to put everything into a
trust immediately. You may need to talk with your accountant and complete a
solvency statement which will show the actions you are taking are not designed
to defeat the rights of creditors.
Another option, depending on your circumstances and the advice of your
accountant, may be to adopt a variation of the gifting programme. This would
involve selling assets at market value to the trust, leaving the purchase price
owing, giving away as much as possible of that amount but leaving enough still
owing to you from the trust to cover liabilities such as a mortgage.
Jane and her business
Jane’s business is going well but she is concerned that if anything did go wrong, she
and her husband Tom could lose their family home. Before Jane and Tom transfer
their property and their investments to a trust, they ask their accountant about signing
a solvency certificate. Their lawyer draws up gifting documents tailored to their
circumstances. They ‘sell’ their property at market value to the trust, treat most of the
sale price as a gift and leave some money owing to them by the trust which is sufficient
to cover any liabilities such as their mortgage and business borrowings.
Assets may be transferred to your trust in order to avoid the risk of a claim
against your estate under the Family Protection Act 1955, the testamentary
promises legislation or other laws. Assets which are held in a trust don’t form
part of your estate and are not subject to attack under this legislation.
If a gifting programme has been used as part of the arrangements for transfer
of assets to a trust, then the amount still owing to you at your death is part of
your estate. This can be claimed under the Family Protection Act and similar
legislation. If a gifting programme is used for some other reason, it’s important
that the amount left owing to you by the trust is completely given away before
you die.
What assets you give to the trust, and how you go about putting those assets
into your trust, will depend on your reasons for wanting the trust in the first
place. Many people have more than one reason for wanting the trust. In that
case it‘s important to be clear which is the most important because this may
help you decide whether you need a gifting programme or not.
Each person’s circumstances will be slightly different and it’s important you talk
this over with your lawyer. As time goes by, you will need to make changes and
it is important you review the way your trust has been set up to make sure it still
meets your needs.
While there can be no hard and fast rules, as a general guideline:
• If your main concern is to ensure there are no claims against your estate
after you die, then you need to give as much as possible to a trust during
your lifetime;
• If your main concern is about a claim by a possible future spouse or partner,
then anything which might possibly be treated as relationship property later
on needs to be in a trust and completely gifted before the relationship starts;
• If your main concern is possible future creditors, then you should gift as
much as possible to your trust while still retaining enough in your own name
to meet current known liabilities.
If your main concern is rest home costs, then you could consider a gifting
programme within the limits set by the Ministry of Social Development.
It’s important to remember that these rules can change. If you’ve a gifting
programme it’s important to discuss this with your lawyer to check that you’re
within the current rules before completing each year’s gifting.
For more information please contact Tina McLennan
