interest given the number of family trusts that have been established
in New Zealand. The abolition essentially means that, from October 1
last year, it is possible to make gifts of unlimited value.
In the context of family trusts, this means that assets (most commonly
the family house) are able to be transferred to a trust in full by way
of gift for no value.
While that makes things tidier on the balance sheet and avoids the
need for an annual gifting programme as required previously, it also
means creditors will have less substantial assets available to satisfy
their claims if default situations arise, since considerable personal
value can now be transferred away outright by gift.
However, as with many things, nothing is as simple as it first
appears. Under the Property Law Act and the Insolvency Act creditors
are able to challenge gifts in certain circumstances.
Section 60 of the Property Law Act 1952 (which has now been replaced
by section 346 of the Property Law Act 2007) provides that a transfer
of property with "intent to defraud creditors" is able to be
challenged by that creditor. This topic was recently considered by the
Court of Appeal in the case of Taylor v Official Assignee.
The Taylors (T) had established their family trust in 2000 after Mr T
became involved in a new IT business venture.
The evidence was that the Taylors had approached their lawyer to set
up the trust following advice from their accountant that it would be a
sensible move given the new business. They established a trust and
transferred their family house into that trust at market value - and
then started an annual gifting programme of $27,000 each per annum to
forgive the purchase price debt owed by the trust.
That type of structure was common practice for the establishment of a
family trust except in this case, at the time the trust was
established, Mrs T owed Inland Revenue Department $4800 in tax
arrears.
By the time the house was transferred to the trust the IRD debt had
been reduced to $3000 and then paid off entirely by December 15, 2000.
Problems arose later when Mrs T's health deteriorated and she incurred
new tax arrears in 2002 which eventually resulted in her being
declared bankrupt in 2006 owing approximately $123,000 to IRD.
The Official Assignee sought to have all the trust transactions
(including the original transactions in 2000) cancelled on the basis
they were undertaken with intent to defraud IRD. The judge in the High
Court accepted this and essentially decided that the Taylors were
lying when they said they established the trust in order to protect
assets in light of the new business venture - instead he decided the
motivation was Mrs T's desire to defraud IRD.
The Court of Appeal, however, rejected that interpretation and instead
accepted that the Taylors were being truthful when they said the trust
was established for asset protection purposes - as indicated by the
fact that Mrs T's tax arrears in 2000 were less than 3% of their
assets, the arrears were paid off in full that year and the form of
the trust transaction was a standard and common form.
In certain circumstances, evidence of fraud at a later time can permit
an inference of fraud at an earlier time (which would expose trust
transactions to being challenged). However, in this case the Court of
Appeal was sympathetic to the significant health problems subsequently
suffered by Mrs T which contributed to the post-2002 tax arrears. The
court decided the trust was established for legitimate purposes and
the later tax arrears did not void the standard trust transactions.
Though each situation will depend on its own facts, the Taylor
decision will be of comfort to many people who have established family
trusts for legitimate purposes and who subsequently encounter
financial difficulties.
For more information on these matters please call our office at 305 548 5020.
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