Asset gifting
Gifting
Most people who form trusts gift away the debt that the trust owes them.
In New Zealand, you can gift up to $27,000 in a 12 month period before you have to pay any gift duty. A couple can therefore gift $54,000 a year without paying gift duty.
This means that a couple who sold their house to their family trust for $200,000 would be owed $200,000, and they could gift that to the trust by way of forgiveness of debt at a total of $54,000 each year. That will take them three years if they want to avoid Gift Duty. (The first gift is made when the trust is formed – year zero – and then a gift is made on the next three anniversaries of the trust’s formation.)
Asset transfer
Once the trust is formed assets can be sold into the trust. It’s important that they are sold to the trust at market value - if they were sold under value or gifted you might have to pay Gift Duty on the transfer. However, although the trust wants to buy, say, your house (and you want to sell it to the trust) the trust has no money to buy it. How then does the trust pay for the house?
The answer to this is that you lend the trust the money – a sort of vendor finance. Initially this is a paper transaction - you sell the house to the trust, and the trust now owes you a house-sized debt.
This has still not really got you further towards your aim of owning less or nothing at all because the debt that the trust owes you is your own personal asset (although any increases in the value of the house after the transfer will “belong” to the trust). How then do you get rid of that debt so that you own less? The answer is gifting.
Gift duty
If, in any 12-month period (not just a calendar or financial year), you give away more than $27,000 to anyone, you must pay gift duty on the excess. It’s the total value of all gifts that counts, not the amount of a single gift. The rates of gift duty are:
| Value of all gifts | Gift duty payable |
|---|---|
| To $27,000 | Nil |
| $27,000-$36,000 | 5% of excess over $27,000 |
| $36,001-$54,000 | $450 + 10% of excess over $36,000 |
| $54,001-$72,000 | $2,250 + 20% of excess over $54,000 |
| Over $72,000 | $5,850 + 25% of excess over $72,000 |
The Inland Revenue Department requires you to file a “gift statement” for any gifts where the total made in a year exceeds $12,000. So you need good records to make sure you comply with all the formalities.
