Gifting to a Trust

Thanks to Marc for the great articles on propertytalk..

I found this to be interesting..and still trying to comprehend it and possible applications..

Gifting to a Trust – Where are we at?

by Tony Fortune – Fortune Manning

Most assets transferred to a trust, at least in the early years of the trust’s existence, involve a debt to the vendor of the asset or to the provider of the funds for the asset purchase. Where that debt is in favour of the settlor of the trust a gifting programme is usually put in place to clear the debt over a period of years at $27,000 per year. Most assets transferred to a trust, at least in the early years of the trust’s existence, involve a debt to the vendor of the asset or to the provider of the funds for the asset purchase. Where that debt is in favour of the settlor of the trust a gifting programme is usually put in place to clear the debt over a period of years at $27,000 per year.

The law relating to such gifting programmes changed on 19 May 1999. There are now no adverse tax consequences as a result of debt forgiveness for a trust where:

the creditor is a natural person who forgives the debt owing by a trust (whether in a will or otherwise);
and the trust was established primarily to benefit:
one or more natural persons for whom the creditor has natural love and affection; or
a charity; or
both of the above.
Where a trustee makes a distribution to a beneficiary which does not come within the above categories, the trustee is deemed to have received gross income to the extent that the distribution is less than or equal to the total amount of debts forgiven by creditors to the trust. This gross income is taxable and should be returned in the year the distribution is made.

Therefore, a gift in reduction of debt only gives rise to tax consequences when distributions are actually made to beneficiaries outside the categories listed above.

When contemplating a gift, settlors/creditors must look at whether the trust was actually established primarily to benefit the persons described above. Trust documents, trustee minutes or a memorandum of wishes of the settlor should indicate which beneficiaries fall into the above categories.

A gift of $27,000 in reduction of debt will create a tax liability for the trust of $9,000 upon distribution from the trust to a beneficiary for whom the settlor/creditor does not have natural love and affection.

The alternative to a gift in reduction of debt is for the creditor to give $27,000 to the trust in cash and subsequently the trust reduces the debt to the creditor by a cash payment. This option of course relies on the creditor having the cash to give to the trust and the trust having a bank account. An overdraft facility may need to be arranged. However care must be taken when considering this option and it must be implemented carefully to ensure that the debt repayment is not considered to be a form of tax avoidance.

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