Legal Tip 238: Gifting as an Asset Protection Strategy

Discussion in 'Legal Issues' started by Terry_w, 13th Sep, 2019.

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  1. Terry_w

    Terry_w Well-Known Member Business Member

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    Gifting property, including cash, shares or real property, is a great way to achieve asset protection under certain circumstances.

    If an at risk person has assets then those assets are at risk too. If the person becomes bankrupt those assets could be lost to creditors. So giving the assets away can prevent them from falling into the hands of creditors.

    But you wouldn’t want to give assets away to random strangers down the street! You might want to make gifts to related parties such as spouses, parents or trustees of discretionary trusts. This way the assets are still within the family group and a certain amount of control can be maintained.

    But there are also many laws to consider when gifting assets. There are

    a) Bankruptcy Act laws relating to defeating creditors, under market value transfers etc which allow the gifts to be undone

    b) State property laws also allow for clawbacks for defeating creditors – including future creditors

    c) Succession Act laws concerning gifts made before death – allowing clawbacks

    d) Family Law Act laws concerning gifts to defeat family law claims – allowing clawbacks

    e) Social Security Act laws relating to gifts and their effects on pensions

    f) Tax laws relating to CGT and deductibility of interest etc

    g) State Stamp Duty laws which may mean duty applies to gifts.


    An example of gifting for asset protection

    Bart sells a house and is cashed up. He makes a $1million cash gift to his parents. His parents then lend him $1mil to buy a new main residence with himself as the legal owner. The parents register a mortgage to secure their loan to Bart.

    Later if Bart becomes bankrupt the parents will be secured creditors and the house will largely be protected. But a trustee in bankruptcy will be likely to look at this transaction and may attempt to get it clawed back so that the $1mil could pass to creditors. Whether they could be successful at this will depend on the circumstances though. Generally, the longer ago the gift was made the stronger the gift will be from attack.



    Example of gifting for asset protection on death

    Homer has married Ned, and the children do no like Ned one bit. Since Marge’s death they have had a falling out with their father about his alternate lifestyle involving drugs, sex and scientology.

    Homer wants to leave the kids a small inheritance and the rest to Ned. He knows the kids can challenge the will and make a family provision claim.

    Homer transfers all his assets to Ned now, before he dies. The house is kept and will be left for the kids. Homer dies 4 years later; the kids get the house and Ned has already received his gifts. These gifts don’t form part of Homer’s estate because they were not owned by him at death. They won’t even be challengeable under a notional estate order because the gift was made more than 3 years before Homer’s death.


    Legal advice should be sought before any major gift is made, even to a related entity.
     
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  2. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Gifting assets or inheritances can enhance risks of asset loss.

    eg Will specifies that on Stuart's death XXXX passes to his (adult) child Barney. At present Barney has a stable marriage job etc. But we he in the future ? Barney also doesnt drink but in three months becomes a chronic alcoholic, gambling addict and starts getting into meth....Should he even be a suitable beneficiary ? Should Stuart reconsider this direct gifting and inheritance ? Once he is dead it is too late.

    And Barney may be involved in business dealings which later turn sour. He runs a franchise store and it seems to be performing OK today BUT may it fail later ? Or is Barney in a high risk occupation. He is a structural engineer for the Opal towers who signed off on the work. Nobody knew that until too late. Now Barney is wishing he hadnt inherited anything since he may lose the lot in the courts.

    Asset risks can also occur through binding death nominations for super. Peter is nominated as a death beneficiary dependent in a valid binding nomination for his Dad, Michaels Govt super. The trustee pays this $1.2m to Peter. A few weeks later Peter dies. His will mentions nothing about his three young children and leaves the lot to his wife Narelle. But Narelle develops a massive drinking and drug problem coping with his death. She blows all the inheritance on meth and pokies. And meets a new guy who is a just a nasty piece of work who spends up helping her waste the inheritance in no time. Peters financial adviser is shattered as he would have recommended Peter consider a discussion with a lawyer to ensure the kids be provided for in a way that stopped his wife from access to some of the assets that even considered independent control of those benefits eg insurance bonds, testamentary trust etc . It just never happened.
     
  3. Silverson

    Silverson Well-Known Member

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    Great post/tip!
     
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  4. Marg4000

    Marg4000 Well-Known Member

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    So Homer has gifted all his assets to Ned except for the house which he leaves to his kids?

    So his house is his entire estate?

    Just as Homer’s children do not like Ned, Ned cannot stand them. Spoilt little brats. Always whinging.
    So Ned, as the lawful spouse, challenges the Will. Chances are that Ned will receive a proportion of the value of the house.


    Possible?
     
  5. Terry_w

    Terry_w Well-Known Member Business Member

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    Yes as a spouse Ned could make a family provision claim. But the courts will take into account gifts Ned had received during homers life time.
     
  6. LATS

    LATS Active Member

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    Hi @Terry_w, the claw back you mentioned earlier on family law, is there a time limit or case by case?
    If a friend (not me i swear) is in a de facto relationship for coming up to 3yrs, and my friend has accumulated her all her assets prior to the relationship. If she gifts them to her parents now as she’s worried about falling out say in 3months time, would claw back apply?
    I know one of it is her parents home and paid and lived in by her parents but is in her name (for loan borrowing reasons). It’ll be unjust that this home is to be split as an example.
     
  7. Terry_w

    Terry_w Well-Known Member Business Member

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    Legal Tip 185: Transactions to Defeat Family Law Claims Legal Tip 185: Transactions to Defeat Family Law Claims

    There is no time limit with family law. Any transaction could be a transaction to defeat a claim.

    Your friend is in for a costly fight potentially. She will have to argue that the house is held as trustee for the parents.

    The best family law strategy is to remain friendly with the ex-spouse to discourage claims which benefit only the lawyers
     
  8. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Read a great case last night about how not to asset protect your home using your spouse. The old - Put it in your wife's name trick. ATO audit and asset shifting to avoid tax by the husband. House was in spouse name etc. Judge delved into the spouse capacity to afford and settle a $12m home and arrived at the view that it was a joint asset as the wife lacked any evidence of possessing personal wealth and assets to effect the acquisition. Judge concluded the funds likely therefore came from the husband and were property that the ATO can sieze or freeze to ensure the debt can be paid.

    Huang Xiangmo: judge to reveal why she froze $140m of Chinese businessman's assets
     
  9. Terry_w

    Terry_w Well-Known Member Business Member

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    This sort of thing is very common. The legal owner is acting as trustee under a resulting or constructive trust for the other spouse.

    Lets hope the ATO gets what it is owed.
     
  10. qak

    qak Well-Known Member

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    Is there any ability at all to defer or avoid CGT (rollover relief?) if gifting assets (shares & property) to a related trust/company/smsf/spouse/minor children/anywhere? Both my partner and I are possibly going to take on (unrelated) positions with liability issues, and the majority of our assets are in our personal names.
     
  11. Terry_w

    Terry_w Well-Known Member Business Member

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    Yes
    Small business c o ncessions
    Bare trustee

    But with any transfer you have consider the bankruptcy and conveyancing act drawbacks as week as trust law