Discretionary trusts - to lend or gift?

If a person has a discretionary trust, they can inject money into the trust either by gifting it, or lending it to the trust.

It strikes me there are plethora of legal and tax issues to consider when deciding between these 2 cases, including taking account of the source of the funds (were they borrowed by the person gifting/lending to the trust, or are just regular savings accumulated over time). In addition to getting the strategy right, it also strikes me that documentation is important (eg. ATO could otherwise view a receipt of funds by the trust as income without adequate written evidence).

There are a lot of posts that touch on various issues on this topic, but no one comprehensive post with the pros and cons. Or have I missed it?

In any case, will obviously need legal advice.

 

The main things to consider are
1. Asset protection
2. Estate planning
3. Income tax

The biggest issue with gifting cash is that it no longer forms part of your estate. A great goal is to maximise your estate upon death as the most effective way to pass on assets and their control is via a testamentary discretionary trust, but if you gift away this generally can't happen unless you plan for the trust to vest at your death.

Speak to a lawyer to tie it all in with your asset protection plan and estate planning.

 

Thanks Terry, will certainly do that. Looking at 1) on its own (asset protection), a loan of course would still be on foot in the event of bankruptcy (of the lender to the trust), and hence still repayable from the trust funds to the (individual’s) bankruptcy trustee. Alternatively, a gift would not ordinarily be repayable to the bankruptcy trustee, unless the gift could be challenged on some other grounds. So, a gift arguably scores higher on the asset protection front.

Of course, there are many other issues to weigh up.

 

Yes a loan is always an asset of the lender so it is important to choose the lender too. But there is more to consider such as asset protection upon death if the controller of the trust is different from the major beneficiary of your estate

 

If you were to 'gift' money to the trust and then go bankrupt, I'm sure it would still be considered a priority payment and clawed back, even if you distributed it to members of the trust...

 

It would depend on when it was gifted and why. Bankruptcy act and state conveyancing acts need to be considered. It might be considered either an undermarket value transfer or a transfer to defeat creditors.

But even where it can be clawed back it doesn't mean it will.

 

Harry, I made a detailed thread out of this topic:

Legal Tip 188: How to Fund a New Discretionary Trust Legal Tip 188: How to Fund a New Discretionary Trust