Small blog, bigger issue. With the abolition of gift duty, many gifting programmes have ceased. However, what has not ceased is advances to trusts. Whether it’s paying the rates, the mortgage, an advance for renovations or a share purchase, the funds keep on flowing.
The issue? Where an advance is made to trustees (and keep in mind that often not all trustees will be aware of the advance), if that loan is not documented, and no previous agreement applies, the trustees do not have the ability to limit their liability.
What that means is in the event of a claim against the creditor (say the settlor), if the trust has insufficient assets, the solvent trustees will be liable to ante up. This is because the advance is an asset of the creditor that could be available to that creditor’s creditors. This might seem convoluted, harsh or unfair; regardless it is a real possibility.
For a practical application of the harsh outcomes that can result see the decision in Peters v Peters NZHC 1061, where two trustees had to sell their home when a supposed gift was called up. See the blog “The importance of being clear”.
The abolition of gift duty is doing very few any favours. Gifting programmes have been abandoned by many; there is a general misunderstanding as to what happens to outstanding balances; and trustees run the risk of being left holding the baby.