Actual Process of Gifting and Loaning back from Trust...

Discussion in 'Accounting and Tax' started by cdremy, 31st Oct, 2011.

Tags:
  1. cdremy

    cdremy Member

    Joined:
    19th Jun, 2007
    Messages:
    26
    Location:
    Melbourne, Victoria
    Hi All,

    I have heard about the gift and loan back strategy for family trusts for a while and was wondering if it was necessary (or even worthwhile) to have formal documents for

    i) the deed of gift
    ii) a loan agreement and also,
    iii) whether it is necessary for the gift amount to actually enter into the trusts' bank account or whether it could simply be a "journal entry" in the trusts' minutes.

    I am confused on this as I have heard alternating opinions and was hoping that the knowledgeable Somersoft forumites would sort me out!

    Thanks.
     
  2. coastymike

    coastymike Member

    Joined:
    24th Jan, 2005
    Messages:
    2,032
    Location:
    mel and syd
    Cdremy

    Yes to all of the above. You should also have a registered charge over the loan and it will need to have commerciality to it. Also make sure it is recorded on any bank loans etc or the whole thing comes undone. Have a chat to terryw he knows how to set these up
     
  3. Terryw

    Terryw Investor

    Joined:
    18th Mar, 2003
    Messages:
    2,863
    Location:
    Sydney, NSW
    May I ask why you want to gift money to the trust?

    If the answer is asset protection then this means you are trying to defeat creditors and the money could be clawed back indefinitely under s121 Bankruptcy Act.
     
  4. coastymike

    coastymike Member

    Joined:
    24th Jan, 2005
    Messages:
    2,032
    Location:
    mel and syd
    Terry

    I am sure Cdremy wants to gift the funds to the trust so that he can provide for his children in the future. Of course he is concerned about his children ending up with unscrupulous people and wants to ensure they can't get their hands on the asset. And being a good trustee he is seeking to obtain a decent return on his investment. ;);)
     
  5. Rob G.

    Rob G. Member

    Joined:
    10th Apr, 2008
    Messages:
    1,151
    Location:
    Melbourne, Victoria
    Hi Terry,

    Mere asset protection is not enough by itself to trigger relation back.

    The post did not say that legal action was threatened or impending.

    Cheers,

    Rob
     
  6. Terryw

    Terryw Investor

    Joined:
    18th Mar, 2003
    Messages:
    2,863
    Location:
    Sydney, NSW
    Rob,

    If someone is gifting money to prevent that money falling into the hands of creditors then I think s121 would apply.

    subsection 1 says the transaction is void if
    a) the money would have been available to creditors, and
    b) the main purpose was to prevent or hinder the money becoming available to creditors

    then at ss 4, it states that a transfer is not void if
    a) consideration was market value. (here it is nil)
    b) the transferee didn't know or could not infer the main purpose was to defeat creditors
    c) the transferee could not reasonably infer the transferor was or was about to become insolvent.

    In this case the trust would be controlled by the same person that is transferring the money.

    So you may be correct. S 121 would apply, but ss 4(c) may be a way out if there was no hint on insolvency.

    Therefore when gifting money to a trust you must be very careful you do not gift so much that you have negative equity (but even then this may not mean you are actually insolvent).

    In any case s120 may also apply when transferring property to a related entity. As long as the transferor is solvent then any transfer could be void for up to 4 years.

    I think there are some other provisions that may also apply.

    http://www.austlii.edu.au/au/legis/cth/consol_act/ba1966142/s121.html
    http://www.austlii.edu.au/au/legis/cth/consol_act/ba1966142/s120.html
     
  7. cdremy

    cdremy Member

    Joined:
    19th Jun, 2007
    Messages:
    26
    Location:
    Melbourne, Victoria
    Hi all,

    Thanks for your feedback and comments. Terryw, In regards to my intention for the gifting yes it is for asset protection, but it is not to defeat creditors as i do not have any! I am a PAYG employee who does not owe money to anyone.

    I have previously looked at the bankruptcy act as suggested by yourself and coastymike and also am of the belief that ss4 would help me as I do not have any creditors that I could be perceived to be defrauding/defeating.

    Thanks for your comments.



     
  8. Terryw

    Terryw Investor

    Joined:
    18th Mar, 2003
    Messages:
    2,863
    Location:
    Sydney, NSW
  9. Terryw

    Terryw Investor

    Joined:
    18th Mar, 2003
    Messages:
    2,863
    Location:
    Sydney, NSW
  10. Ms Jade

    Ms Jade Down the Rabbit Hole

    Joined:
    11th Aug, 2004
    Messages:
    1,302
    Location:
    Mornington Peninsula
    I'm a bit confused. Why does "gifting" need a documented loan? Couldn't a gift just be a settled sum?
     
  11. Terryw

    Terryw Investor

    Joined:
    18th Mar, 2003
    Messages:
    2,863
    Location:
    Sydney, NSW
    The question may arise is it really a gift or a loan?
     
  12. coastymike

    coastymike Member

    Joined:
    24th Jan, 2005
    Messages:
    2,032
    Location:
    mel and syd
    Exactly Terry. Counsel for the creditor arises and asks for the documentation showing that a gift was made to the trust. Ohh no such documentation exists your honour. We as counsel therefore contend that the gift was not a gift. It was a loan on interest free terms. Please provide the courts with evidence that this was not a loan and was in fact a gift.

    Smart person, who consulted someone beforehand, pulls out their resolution of gift and resolution of acceptance of gift with appropriate wording. Dumb person says "ohh **** i havent got any documentation"
     
  13. Ms Jade

    Ms Jade Down the Rabbit Hole

    Joined:
    11th Aug, 2004
    Messages:
    1,302
    Location:
    Mornington Peninsula
    That's very interesting; thanks Terry & Mike.
    Is there a potential benefit loaning the $ to the trust rather than gifting? As in the interest owed to me accrues in the trust to be paid back at some later date?
     
  14. Terryw

    Terryw Investor

    Joined:
    18th Mar, 2003
    Messages:
    2,863
    Location:
    Sydney, NSW
    There can be advantages in loaning. Maybe you need to borrow money from your LOC to enable the trust to buy property. You could onlend the money to the trust so that the trust ends up paying the interest. If you borrowed and gtfted to the trust the interet you incurr wouldn't be deductible.
     
  15. cdremy

    cdremy Member

    Joined:
    19th Jun, 2007
    Messages:
    26
    Location:
    Melbourne, Victoria
    In that situation though, couldn't you show a copy of the trusts' bank statement showing the deposit of the money into the trust's account accompanied by the words "Gift" in the description column and then the corresponding outflow of money with the reason "Loan to XXXX"?

    Sure it's informal, (and as described earlier, worth getting the appropriate paperwork drawn up), but it's clearly better than any evidence the counsel would have to support their assertion?
     
  16. Mry

    Mry Member

    Joined:
    14th Dec, 2004
    Messages:
    1,367
    Location:
    Brisbane, QLD
    In NTAA seminars I have attended, they use the phrase "Self Serving Documentation." In other words, you need the paperwork to backup your arguments prepared in advance properly or you may not as well do it because it doesn't prove anything. Bank transfer descriptions mean nothing. Where's the deed of gift? Where's the loan agreement?

    You have to prove your case to the court in the event of a bankruptcy, not the other way around.