More on Gift Duty
The Government has stated its intention to abolish gift duty, most likely from 1 October this year.
Gift duty has existed in New Zealand in one form or another since the mid 1880s and, in a large part was always considered a deterrent to people transferring ownership of their assets prior to their death in order to avoid death duties.
However estate duties were zero rated in the early 1990’s, before being abolished altogether by the last government. So, with New Zealand having one of the largest number of family trusts per head of population of any country in the world, one can surely argue that they abolishing gift duty is a great move. Right?
Well, before we celebrate the demise of gift duties too long and hard, remember this, the very act of completing annual gifting at least caused yearly attention to be focused on the trust and, if there had been any other material changes of circumstances, gave rise to opportunity to address those issues.
So, if anyone is thinking that the abolition of gift duty will mean you can simply ‘set and forget’ your family trust and never have to turn your mind to it again, we would suggest that this is a recipe for potential disaster.
In order to obtain the protection of assets that one seeks from a trust, it is vitally important that the trust not be seen as a sham, or simply an ‘alter ego’ of the settlor’s.
If there were to be a move away from annual meetings of trustees with advisors, then the risk would be high that trust assets could be treated by settlor’s in the same manner as personal assets, potentially putting the trust at risk.
The reality is that there is so much more to trust administration and compliance than the, soon to be non-existent gifting programs. One should turn ones mind to a myriad of other issues on a regular basis. Such issues as whether there are other assets which could or should be in the trust. Are the trustees and beneficiaries still appropriate i.e. have there been any material changes of circumstances? Often one can overlook an inheritance, a cashed in superannuation, redundancy payment, or the proceeds from the sale of an investment asset which perhaps ought to be in the family trust.
For those of you who have put off forming a family trust because of age and the time which was going to be taken to gift the assets to the trust fully, the change of law may well provide an opportunity for your assets to be effectively transferred to a trust. Much will depend on how the ‘look back’ rule is addressed by the Ministry of Social Development. At present there is a 5 year look back period for assets gifted prior to an application for a residential care subsidy, but it is possible but not necessarily inevitable that this period could be lengthened by change of policy.
However, the same warning applies; the abolition of gift duty will place an onus on trustees to ensure that trust activities and record keeping are first rate in order to avoid any risk of the assets being seen to have been treated by the settlor’s as their personal assets, ignoring the existence of the trust.