Langley Twigg Law Hawke's Bay

When gift duty is abolished from 1 October 2011 many people will gift away all debts owed to them by their family trust. But  that may not always be the best thing to do.

Under the present gift duty regime the debt back from the sale of an asset to a family trust can be reduced by no more than $27,000 per annum without incurring duty. The gift duty regime acts to slow the divestment of assets into family trusts.

Once gift duty is repealed the decision on whether to gift all debts owing by your family trust involves balancing on one hand the need or desirability of having recourse by right to the assets in the trust and on the other hand exposure to creditors, relationship property claims and succession claims.

Why Not forgive the debt?

In some circumstances it may be preferable to retain a debt owing to you personally.

A retired couple with their house in trust but with few personal assets may wish to retain a debt back to themselves so that they have the security of being able to call it up by right should they need to do so.

One partner in a relationship who has separate property, say from an inheritance may well want to advance those funds to the trust and preserve the debt owed personally.

Why forgive the debt?

Those assets that are not gifted to the trust at any time can be the subject of claims by general creditors, of relationship property claims, and of Family Protection Act claims. Assets that are not gifted to the trust will count against you under any means testing regimes, whereas assets that are gifted may or may not count against you, depending on the regime in place at the time.

When gift duty is repealed it will be important to appraise the factors for and against partial or complete gifting based on your personal circumstances. We strongly advise that you speak with your solicitor before attempting to gift away all debts owed to you.

By Nigel Loughnan