Gift Duty has been repealed effective from 1 October 2011. After that date it is possible to gift an unlimited amount without incurring gift duty.
It isn't that simple. There are a number of issues you should consider before resolving to do so.
Residential care subsidies
The principal enshrined in the Social Security Act 1964 is that people should use their own resources first before looking to the state for assistance.
Subsidy applications will come under closer scrutiny in future.
Asset thresholds for getting a subsidy applying from 1 July 2011 to 30 June 2012 are:
Do not have a partner - $210,000 (all assets including house)
Has a partner also in care - $210,000 (all assets including house)
Has a partner not in care – either $210,000 (all assets including house) or $115,000 excluding home and car where partner or a dependent child resides in the house.
The threshold increases by $10,000 on July 1st each year until 2025 when the level will be $350,000. Personal effects, household chattels (may exclude valuable antiques) and a prepaid funeral of up to $10,000 (for each partner) are excluded from the financial means assessment.
There is no partial subsidy. You either qualify or not. If the financial means assessment assesses assets in excess of the threshold, then the applicant will be required to pay for their own care in full until such time as their assets diminish to the threshold applying at that time. Then they may again apply for a subsidy.
The Ministry of Social Development ("MSD") treat assets sold to a trust and the consideration gifted over time, as asset deprivation. Their policy is that the value of the asset is added back in the financial means assessment, and a small amount of gifting is allowed. From 1 July 2011, allowed gifts will be $6,000 per year per application ($5,500 to 30 June 2011) for gifts made within 5 years of the application and $27,000 per year per application for gifts made more than 5 years prior to the application.
MSD have publicised that they intend to continue their current policy. The outcome is that after 1 October 2011, only $27,000 of any gift made more than 5 years prior to the date of application for a subsidy will be allowed, and any gift in excess of that amount will remain as an asset of the applicant.
It is still possible to continue gifting at $27,000 per person per year to maximise your chances of obtaining a subsidy under the present policy.
The following example shows the difference in continuing gifting at $27,000 per year after 1 October 2011 and forgiving the remaining debt in one gift. The example is set in October 2020 and is for a couple, one of whom will continue to live in the house owned by the trust and the other is about to go into a rest home and applies for a subsidy.
The subsidy threshold that will apply in October 2020 will be $300,000 or $205,000 excluding home and car. The $205,000 option is not available in this instance as the house is owned by a trust. Only one gift of $27,000 per year per application counts (i.e. only $27,000 per couple).
Assume that the house was sold to the trust in 2005 and gifting commenced then.
MSD Assessment
1. Continue to Gift $27,000 each year
Value of assets disposed of 627,000
Allowable gifts $27,000 2005 to 2010 162,000
Allowable gifts $27,000 2011 to 2015 135,000
Allowable gifts $6,000 2016 to 2020 30,000
Total Assets for Financial Means Assessment 300,000
2. Gift remaining debt in 2011
Value of assets disposed of 627,000
Allowable gifts $27,000 2005 to 2010 162,000
Allowable gift 1/11/11(final gift of $465,000) 27,000
Total Assets for Financial Means Assessment 438,000
In this example, the threshold is $300,000 to obtain a subsidy. Option 1 qualifies but Option 2 does not. In option 2, only $27,000 of the final gift made of $465,000 will ever be allowable, so the applicant will need to pay full rest home fees until such time as the assets fall below the threshold.
There is no way to improve the position in option 2. Currently rest home fees are around $41,600 per annum ($800 week). In this example, the Trust may be required to sell assets to fund around 3 years of rest home fees.
MSD gives people in such position the option of "undoing" the trust and putting the assets back into their own names names. For couples where one is going into care and one is remaining in the family home, this allows application of the threshold of $115,000 (at 1 July 2011) excluding house and car. But of course this brings the loan back at its then value and if the other partner ends up in care the advantage is lost.
Unless there are compelling reasons not to do so, then it may be prudent to continue gifting at $27,000 each year rather than gift the remaining balance in full.
Solvency
You must be solvent at the time you make a gift. The Insolvency Act and the Property Law Act provide that a person is solvent if they are able to pay all their debts, as they fall due, from assets or income other than the property gifted.
Guarantees are treated as personal debts in assessing solvency. If you have given a guarantee, you cannot alter your position to the detriment of the person to whom you gave the guarantee.
If you have given a guarantee then you must retain assets of at lest equivalent value in your own name. If all or most of your assets are in your trust and your only remaining asset is a loan to the trust that you have been gifting off, then you cannot gift that loan to an amount less that the amount of the guarantee.
There are provisions in both the Insolvency Act and the Property Law Act to cancel gifts made if the person gifting was insolvent at the time of making the gift. Depending on the guarantee, this may be a risk worth taking.
Relationship property issues
Under the Property (Relationships) Act, property in the names of the spouses/partners is classified as either relationship property (generally shared 50/50) or separate property (not shared).
Separate property would include assets that a person had acquired prior to the relationship or assets acquired by gift or inheritance, but not usually the family home. If assets that are separate property are sold, generally the proceeds remain separate property.
Where separate property (either assets or cash) is lent to a trust for the benefit of you and your partner, the separate property status will be lost on gifting. Doing so precludes you from claiming the gifted funds as separate property in the event of the relationship ending. This applies to trusts established prior to the relationship as well as those established during the relationship.
Care should be exercised here.
Family protection act claims
Any spouse, child or grandchild can make a claim against your estate under the Family Protection Act if they believe you have not adequately disposed of your moral obligation to provide for them in your will.
Any funds that the trust owes you on your death, falls into your estate. Even though you may forgive the debt in your will, it still becomes part of your estate before it is forgiven. This puts that sum at risk from an aggrieved family member.
This is particularly important if there has been or will be unequal distributions from the trust. An aggrieved family member cannot attack the trust directly, but can attack your estate. The Court may award funds to the aggrieved family member (limited to the value of your estate at date of death), which may require the trust to find the funds to pay the award.
Gifting the full balance pre-empts this occurring.
Future law changes
There is a risk that a future Government may change the rules again. Indeed, the Labour Party has indicated that it would reinstate gift duty in future.
For those people who are not concerned about rest home subsidies, solvency issues or relationship property issues, then perhaps protection against future legislative changes may be sufficient reason to complete their gifting programme with one gift.
- Michael Win is a Partner with Rodgers-Law in Dunedin and advises small and medium sized businesses on all aspects of commercial law. © 2011 Rodgers-Law
