A \u201cgift and loan back\u201d arrangement has been used by clients as a popular strategy to reduce the assets in their personal name.<\/p>\n
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.<\/p>\n
Clients have typically used this strategy for two reasons:<\/p>\n
1. To protect their personal assets from risks associated with business (creditors).<\/p>\n
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.<\/p>\n
As an example:<\/p>\n
Peter runs his own business and owns a home valued at $2 million. No mortgage.<\/p>\n
Under a gift and loan back arrangement:<\/p>\n
1. Peter would gift $2 million to his discretionary family trust;<\/p>\n
2. The discretionary family trust would then loan the $2 million back to Peter; and<\/p>\n
3. The discretionary family trust would put a mortgage on Peter\u2019s home for the $2 million loaned.<\/p>\n
If a creditor then sued Peter, the $2 million would not be available as the discretionary family trust would have security over Peter\u2019s home for $2 million dollars.<\/p>\n
However, in the recent decision of Re Permewan No. 2 [2022] QSC 114 (Re Permewan), the Supreme Court has scrutinised these types of arrangements.<\/p>\n
Prudence Permewan (\u201cthe deceased\u201d) died in 2019 leaving behind three adult children.<\/p>\n
The deceased\u2019s only son was appointed as executor of the estate, which had a value of approximately $3 million comprising the deceased\u2019s home and some shareholdings.<\/p>\n
The deceased\u2019s will gifted the entirety of the estate to her existing family discretionary trust, and also appointed the deceased\u2019s son as the controller of that trust. The effect of this was that the son was in control of all the deceased\u2019s assets to the exclusion of her other two children.<\/p>\n
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\u2019s home and also registered security over her shares.<\/p>\n
The deceased did not have sufficient liquidity to gift cash to the trust, and no money \u2018changed hands\u2019. The effect was that all of the deceased\u2019s \u2018worth\u2019 shifted into the trust, leaving the estate with little value for the deceased\u2019s other two children to claim against.<\/p>\n
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.<\/p>\n
The Court found that the transaction was a \u2018sham\u2019 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.<\/p>\n
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.<\/p>\n
The Court\u2019s 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.<\/p>\n
To speak to one of our experienced wills and estates lawyers call\u00a01800 957 936<\/a>, email\u00a0mail@rmolaw.com.au <\/a>\u00a0or submit an enquiry below.<\/p>\n We are available to meet with you at any of our local offices (Brisbane, Gold Coast, Beenleigh, Cleveland and Jimboomba<\/a>) or by telephone or video-conference.<\/p>\n 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.<\/em><\/p>\n Written by Kylie Shaw<\/a> \/ Authorised by Tim Ryan<\/a><\/em><\/p>\n","protected":false},"excerpt":{"rendered":" Reverse mortgages are known to be a \u201clast resort\u201d for retirees and pensioners. The main reason for this low usage of reverse mortgages is due to the risk of will disputes between beneficiaries and reduced equity later in life.<\/p>","protected":false},"author":5,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[1],"tags":[],"expertise":[311],"class_list":["post-26412","post","type-post","status-publish","format-standard","hentry","category-uncategorized","expertise-wills-estates"],"acf":[],"_links":{"self":[{"href":"https:\/\/rmolaw.com.au\/zh\/wp-json\/wp\/v2\/posts\/26412","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/rmolaw.com.au\/zh\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/rmolaw.com.au\/zh\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/rmolaw.com.au\/zh\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/rmolaw.com.au\/zh\/wp-json\/wp\/v2\/comments?post=26412"}],"version-history":[{"count":3,"href":"https:\/\/rmolaw.com.au\/zh\/wp-json\/wp\/v2\/posts\/26412\/revisions"}],"predecessor-version":[{"id":28972,"href":"https:\/\/rmolaw.com.au\/zh\/wp-json\/wp\/v2\/posts\/26412\/revisions\/28972"}],"wp:attachment":[{"href":"https:\/\/rmolaw.com.au\/zh\/wp-json\/wp\/v2\/media?parent=26412"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/rmolaw.com.au\/zh\/wp-json\/wp\/v2\/categories?post=26412"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/rmolaw.com.au\/zh\/wp-json\/wp\/v2\/tags?post=26412"},{"taxonomy":"expertise","embeddable":true,"href":"https:\/\/rmolaw.com.au\/zh\/wp-json\/wp\/v2\/expertise?post=26412"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}