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Gift and Loan Back

A “gift and loan back” arrangement has been used by clients as a popular strategy to reduce the assets in their personal name.

A gift and loan back arrangement involves an individual gifting their wealth to a de-risked related entity like a discretionary family trust. The discretionary family trust then loans the money back to that individual and takes a secured mortgage over the property.

Clients have typically used this strategy for two reasons:

1. To protect their personal assets from risks associated with business (creditors).

2. As an estate planning strategy (where notional estate does not apply) to shift assets out of their personal name/s to reduce the estate pool which may be vulnerable to a family provision claim/contest.

As an example:

Peter runs his own business and owns a home valued at $2 million. No mortgage.

Under a gift and loan back arrangement:

1. Peter would gift $2 million to his discretionary family trust;

2. The discretionary family trust would then loan the $2 million back to Peter; and

3. The discretionary family trust would put a mortgage on Peter’s home for the $2 million loaned.

If a creditor then sued Peter, the $2 million would not be available as the discretionary family trust would have security over Peter’s home for $2 million dollars.

However, in the recent decision of Re Permewan No. 2 [2022] QSC 114 (Re Permewan), the Supreme Court has scrutinised these types of arrangements.

Prudence Permewan (“the deceased”) died in 2019 leaving behind three adult children.

The deceased’s only son was appointed as executor of the estate, which had a value of approximately $3 million comprising the deceased’s home and some shareholdings.

The deceased’s will gifted the entirety of the estate to her existing family discretionary trust, and also appointed the deceased’s son as the controller of that trust. The effect of this was that the son was in control of all the deceased’s assets to the exclusion of her other two children.

The case examined a number of transactions which the deceased undertook in 2018. The deceased gifted $3million dollars to the family trust via a promissory note (which represented her approximate net worth at the time). The family trust then loaned the $3million back to her, which was documented via a loan agreement. The family trust registered a mortgage over the deceased’s home and also registered security over her shares.

The deceased did not have sufficient liquidity to gift cash to the trust, and no money ‘changed hands’. The effect was that all of the deceased’s ‘worth’ shifted into the trust, leaving the estate with little value for the deceased’s other two children to claim against.

The other two children filed an application for family provision on the basis that the transactions that their mother had entered into were invalid and unenforceable.

The Court found that the transaction was a ‘sham’ in that there was no intention for the deceased to pay back the $3 million loan and the trust never intended to enforce payment of the loan. There was no evidence that the promissory note had been delivered, which meant that the transaction was technically incomplete.

The Court made it clear that in gift and loan back arrangements, it will not accept illusory transactions that attempt to circumvent important legislation that requires that members of a deceased family are provided for financially where they are found to be in need. The Court ultimately found that the gift loan back arrangement in this case was invalid and unenforceable.

The Court’s comments in Re Permewan are concerning for anyone with a gift and loan back arrangement. When considering a gift loan arrangement it is important that the gift and subsequent loan involve a physical transfer of consideration/funds and that the documentation implementing the arrangement are both valid and complete.

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This article is for your information and interest only. It is not intended to be comprehensive, and it does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.

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