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Acknowledgement of Debt, Agreement for Sale and Purchase, Cases, Gifting, Trustee retirement, Trustees

Debts owing by trustees “real”

When assets are transferred to a trust by a settlor the transfer is generally by way of gift or sale.  Where assets are sold there is a gift back that can be forgiven immediately, progressively or at some future date, if at all.

Prior to the abolition of gift duty gifting programs were common and gifts were made annually at the maximum permissible rate of $27,000.  Since the abolition of gift duty many gifting programs have been abandoned.  Sometimes because of the erroneous belief that outstanding gifts were automatically forgiven when gift duty was abolished.

In some instances debts are not forgiven as the settlors wish to retain the ability to call up the debt.  However, this can also be the end result even where this was not intended.  Consider the following facts:

  • settlors sell a farm property to trustees for $1m in 2001
  • there is a debt back to each of them of $500,000
  • four annual gifts of $27,000 are made by each of them
  • when gift duty is abolished the balance owing is not forgiven [no reasons or explanation or provided in the judgment so it is not possible to determine whether the gifting program lapsed intentionally]
  • when the parties separate in 2012 the debt owing to each of them is $419,000
  • formal demand is made by Mrs Shailer
  • the trustees have sufficient funds to meet the demand
  • the independent trustee retires just before the matter is heard
  • the arguments raised in defence include arguments that:
    • the High Court does not have jurisdiction and the claim should be heard in the Family Court
    • the claim really a relationship property matter and is not appropriate for resolution under the summary judgment procedure
    • the Trust is entitled to set-off a debt owed to the Trust by the partnership against Mrs Shailer’s claim

The court is not minded to exercise its discretion not to grant summary judgment and none of the arguments are successful.  While the trustees are given the opportunity to resolve the matter, the case highlights the importance of appropriately managing gifting.

In this regard it is noted that it would appear that many gifting programs are being abandoned following the abolition of gift duty without due care being given to the reasons whether or not to gift.

At at time when trusts are coming under increased attack, keeping up with gifting is one way of reducing the risk of debts being called up when this is not what the parties originally might have intended.

References:

  • Shailer v Shailer [2015] NZHC 250

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