As you will be aware, the impact of Covid-19 is likely to be felt for some time. The reality is that many businesses will struggle to carry on business as usual, which will impact their cashflow and therefore their ability to meet their liabilities.

For those of you in business, it is likely that the main reason you set up a Trust was to protect your personal assets from being subject to a claim from business creditors. Unfortunately, we have found that over time, and particularly with the abolishment of gift duty, many people’s annual gifting programme has fallen to the bottom of their “to-do” list, which leaves your personal assets open to claims made by business creditors.

WHAT IS A GIFTING PROGRAMME?

When a Trust is set up, it does not hold any assets nor have any income. The Trust is therefore unable to “pay” for purchasing your family home (or any other assets that may be transferred to the Trust).

To get around this, the transfer of your home (or other asset) from you personally to the Trust is structured so that legal ownership of the property is transferred to the Trust and a Deed of Acknowledgement of Debt is entered into, which records that the Trust owes you a debt equal to the value of the equity you have in that property.

The debt (being the value of the equity you have in that property), is then gifted to the Trust by you – either over time, or immediately, depending on the intended purpose of your Trust. As you build up more equity in the property, the opportunity is there to advance that additional equity to the Trust. This is done by entering into a further Deed of Acknowledgement of Debt, which records that the Trust owes you an further debt equal to the value of the additional equity you have built up in the property, which is then gifted to the Trust by you. It is only by gifting the value of assets to the Trust that you increase the value of assets that are “protected” by the Trust.

You should however be aware that completing a gifting programme for the value of your property is not necessarily the end of your gifting programme.

You will need to complete a further gifting programme if:

1. You transfer additional assets from you personally to the Trust (for example: investment portfolios or rental properties).
2. You use your personal funds to cover costs that should have been paid by the Trust (such as mortgage payments, rates, body corporate levies, repair and maintenance costs of a property owned by the Trust). In some cases, if you are a beneficiary of a Trust, the Trustees may have decided to allow you to reside in the Trust’s property on the basis that you pay all usual outgoings in relation to the property, in which case further gifting for these costs will not be necessary.

WHY IS A GIFTING PROGRAMME IMPORTANT?

Where an asset has been transferred from you personally to a Trust, any debt owed to you by the Trust, which has not been forgiven, is an asset that is available to be called on by business creditors, if you owe them money.

As such, we cannot emphasise enough how important it is to ensure that your Trust’s gifting programme is up to date.

WHEN SHOULD I COMPLETE GIFTING?

We recommend that you annually review your gifting programme to ensure that it is up to date.

Although gifting is not a magical solution, it can assist to protect your personal assets if your business falls upon hard times. However, it can only do so if you complete your gifting while things are good – any gifts made to a Trust where you have knowledge that the business is in trouble or where you have been bankrupted in the past two years can be “clawed back” to pay creditors.

As you would have set up your Trust to prevent yourself from such a risk – now is not the time to become complacent.

HOW SHOULD I COMPLETE GIFTING?

If you have any concerns in relation to your Trust’s gifting programme, please feel free to contact us.

In some situations, ascertaining the status of your Trust’s gifting programme will require us to liaise with your accountant – we are happy to do so directly, to take the pressure off you. We can then prepare the required documentation and meet with you to arrange signing.