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.
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:
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 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.