1. When you have to be right.
Honey, I forgot to do my gifting

2. It is a common misconception that gifting was
abolished along with gift duty. Ironically, now that
people can gift without limit, increasingly gifting
programmes are not being maintained.
VickiAmmundsen explores the consequences of
abandoning gifting programmes and how this can be
addressed.
Prior to the abolition of gift duty, gifting programmes
were common. When assets were sold to a trust the
mechanism was a deed of sale and an
acknowledgment of the debt back, which was then
progressively forgiven. Annual trustee meetings
commonly occurred at the same time as gifting was
carried out. This served the dual purpose of ensuring
that gifting was attended to and allowing dialogue
around trust management so that, among other
things, any further advances were identified and
recorded.
All that changed in 2011 when gift duty was
abolished. The Government’s decision to abolish gift
duty was based on the high cost of retaining a tax on
gifting that no longer generated significant revenue.
However, this decision was a governmental policy
decision and was not based on consideration of the
consequences for private individuals of not
maintaining a gifting programme.
Four years later these consequences are already
becoming apparent.
So why is it still important to gift?
The house ma’am, nothing but the house
One premise behind the abolition of gift duty is that
there is only a single type of gifting programme. Para
25 of the Inland Revenue “Regulatory Impact
Statement: Gift Duty Repeal” notes:
“Gift duty is easy to avoid through the use of gifting
programmes. Under a gifting programme, an asset is sold
at market-value in exchange for an interest-free,
on-demand loan for the value of the asset. Legal title to
the asset instantly transfers, but no payment is made.The
interest-free, on demand debt that the recipient of the
asset owes to the donor is then progressively forgiven by
the donor at a rate of $27,000 every twelve months.The
forgiveness of the debt constitutes annual gifts; however
they are within the accepted level so as not to attract
gift duty. Until it is completely forgiven, the debt owed is
legally an asset of the donor and the donor can demand
that it be repaid.”
Is this correct, however, given that the family home
is the sole asset for many discretionary family trusts?
The transfer of the family home may represent the
most significant gift to a trust but, if a trust has no
other assets, the settlors or other beneficiaries must
necessarily continue to advance funds to meet the
costs incidental to home ownership (eg rates,
insurance and maintenance). While these expenses
may not be significant individually, an accurate
record is extremely important in ensuring the proper
management and administration of any trust.
Indeed, from little advances mighty debts grow.
Where the habit of regular gifting is lost, it is easy
to lose sight of how much has been advanced to the
trustees.
The loan–gift tug of war
Where advances are not documented, questions can
be raised as to whether the advance is a loan or a gift.
The wider issues that can flow from this are
illustrated by the case of Peters v Peters (2013) 3
NZTR ¶23-004.
In this case, after it was accepted that the advance
was not a gift, the trustees who had tried to retain
the loan advance sued the lawyers who acted on the
matter. The Court found the lawyers guilty of
negligence for failing to accurately determine (and
document) the nature of the advance.
The decision also highlighted the risks of
undocumented advances to trustees who, in the
absence of a formal agreement, are unable to limit
their liability to the assets of the trust as is normally
the case. As noted in Peters v Peters at [93]:
“…That conclusion accords with evidence given by both
MrGraham and Mrs Edna Peters. Each said that if they
had been informed that the $800,000
represented a loan for which they would have a
liability to repay, they would not have committed to
borrowing those moneys.”
Honey, I forgot to do my gifting

3. Creditor windfall
If gifting falls into arrears, unforeseen creditors may
receive a windfall. Consider the possibility of selling
a house to trustees and gifting the full purchase price
immediately. Each year after the sale, advances are
made to meet insurance, rates, maintenance and the
occasional renovation. Without anyone noticing, over
the period of 10 years $200,000 of undocumented
loans accrues. When the settlor’s business fails, he
and his wife are grateful that the trust was settled
and the house was sold to it long before the
business venture commenced. However, if the set-
tlor is successfully sued by a creditor and bankruptcy
ensues, there is a possibility that the Official
Assignee will call up the advances made by the
settlor.
Till divorce us do part …
Sometimes debts owing by trustees are called up by
someone closer to home.
There can be good reasons to leave a debt owing so
that the lender retains the ability to call up the debt.
However, this can also be an unintended end result.
The recent case of Shailer v Shailer [2015] NZHC 250
provides a practical example of the consequences of
incomplete gifting. In this case Mr and Mrs Shailer
sold their farm to trustees of a trust they had settled
for $1m in 2001. The initial $500,000 debt owing
back to each of them was reduced by four annual
gifts of $27,000. The gifting programme then stopped
and when Mr and Mrs Shailer separated the debt
owing to each of them was still $419,000.
Unhappy differences continued and ultimately
resulted in a High Court judgment in Mrs Shailer’s
favour. The question of how the liability should be
divided between the trustees (including Mrs Shailer)
remained to be determined.
I know I had a gifting programme — I just
don’t remember why
There are, of course, valid reasons not to gift.
However, it is important that the decision not to gift
results from a positive choice rather than simply the
failure to gift.
One reason not to gift (or at least to exercise caution)
is where future prospects of a residential care subsidy
(RCS) are entertained. The possibility of qualifying for
a long-term RCS has been a motivating factor behind
the settlement of many trusts. However, it is
important to appreciate that the abolition of gift duty
had no impact on the levels of permissible gifting for
RCS purposes. Before a person goes into care, it is still
permissable to gift:
• $27,000 per annum outside the five-year
gifting period, and
• $6,000 per annum within the five-year gifting
period.
However, following the Court of Appeal decision in
Bridgford vChief Executive of the Ministry of Social
Development (2013) 3 NZTR ¶23-011 the question
of whether gifts made by couples are aggregated
for RCS purposes has been decided in the Ministry’s
favour, meaning that the permissible limits are
generally aggregated.
For some people, a practical response may be to limit
annual gifting to $13,500 each for a couple. However,
note that for the last five years before a person goes
into care, the annual limit is $6,000. For this period, a
cautious response would be to limit gifting to $3,000
each.
It is also important to note that $27,000 gifts
cannot be spread. Therefore, a single gift of $270,000
counts as $243,000 over the threshold and cannot be
discounted over time.
More than just a piece of paper
Gifting is more than just keeping track of the
numbers and filing the correct documents. Careful
attention to how a trust is funded can have a positive
impact on the overall trust governance and avoid
prolonged unhappy litigation if disputes arise over
who paid for what and who was repaid and who was
not.
In the initial case of Spence v Lynch [2013] NZHC
1478 (at least eight more proceedings followed),
the scene is set succinctly in para [3] of the decision
where the judge notes that “despite the initial
orthodox and sensible arrangements evinced by the
trust and s 21 agreement, carelessness, confusion,
and chaos rode in behind the couple.”
The judge later notes:
“I find it remarkable that a professional trustee … did not
inquire or insist that some documentation was in place …
to record the large advance made on 11October 2006
and the terms on which such an advance was made.This
was a year before Mr Lynch retired as trustee. Doubtless
in some measure that oversight on his part lies behind
the $155,000 settlement payment he has made to Mr
Spence.”

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Some structure around documenting advances,
whether or not any of these were forgiven, might
have enabled the parties to avoid the serial litigation
that followed as the result of the financial chaos the
trust accounts represented.
Set and forget?
Trusts can provide excellent long-term asset
protection. However, they need time, attention and a
firm hand to ensure a robust asset and estate
planning structure.Very few trustees have the skills and
resources to manage a trust without expert
guidance.The use of professionally drafted, maintained
and updated gifting precedents can help ensure that
trust management is appropriate and nasty surprises
are avoided.
Phone:0800 500 224
Email:nzsales@cch.co.nz Web: www.cch.co.nz