It is still as important as ever to avoid delay in ensuring your trust affairs are in order. A trust is almost always put in place to protect you against risks and if a trust is not administered properly, you risk it failing to provide you with that protection when you need it.
A trust protects the assets inside it because if someone makes a claim against you personally, you can say that you don’t own the assets (the trust owns them) and so those assets are not available to satisfy the claim.
However, if the trust owes money to you (just the same as if anyone owes money to you), then the money that is owed to you is one of your personal assets and that money is available to satisfy the claim against you personally.
The most common way that the trust ends up owing you money is through outstanding gifting.
Outstanding gifting can come to pass in a number of ways:
- Since the abolition of gift duty, gifting programs where you gifted a small amount per year are usually not necessary, but this has meant that some of them were abandoned part what through and the full gifting has not been completed;
- If you have put any assets into a trust or paid your personal money towards improving those assets once they are in the trust; and
- Often the way that your accountant handles the trust accounts to save you money on things like tax results in the accounts showing that the trust owes you money.
DOES THE TRUST OWE YOU MONEY?
To find out whether outstanding gifting is an issue for your trust, you only need to answer the question of whether the trust owes you any money. Unless you keep your own trust records, this in most cases will need to be answered by your accountant and your lawyer together as each have different records of the process.
If the answer above is “yes”, we strongly recommend that you contact us to consider whether gifting is appropriate.
We are particularly concerned at this time about trusts which are in place to protect against personal creditors (which are most common if you run your own business). If you have outstanding gifting, gifting it away when those creditors are already breathing down your neck will not protect those funds as the creditors will be able to reach into the trust and pull the gift back. If you make the gifts before those creditors are a reasonable possibility, however, that is the ideal situation.
Gifting when creditors are not on the horizon does not protect you from all situations. For example, any gifts within 2 years of bankruptcy are automatically void. However, the sooner the gifting can be brought up to date, the better as there is then less risk and less money at risk as time goes by.
We are no authority on the financial future of the world, but it is reasonable to expect that trying financial times may be a feature in the coming months at least for some industries. Accordingly, if business owners were to ensure that their trust gifting is up to date well before those issues descend, it would be much better than considering the situation once the business is already in trouble.
Timing of gifting is important and so immediate gifting is not always appropriate and it is not always a silver bullet to protect against all creditors, but getting your gifting right and keeping it up to date in a timely manner can save you sometimes hundreds of thousands of dollars that would otherwise be successfully claimed by creditors.