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23 July 2015 | Paul Paxton-Hall, Paxton Hall Lawyers

Gifting as an estate planning technique

The fast growing trend of "gifting" as an estate planning strategy can be a win-win for clients and beneficiaries, but it's fraught with pitfalls for the unwary and is something not to be taken lightly.

Gifting has become a desirable form of asset divestment for many people, particularly with those who wish to ensure their assets end up with the person of their choosing.

The idea of gifting money or property as a way to either assist children or other family members acquire assets or get their foot in the property market is becoming increasingly common.

For some people, it's a way of giving their children a leg up with the early sharing of wealth built up over a lifetime.

But while gifting is becoming more and more common, it's certainly not something to consider lightly as assets potentially worth hundreds of thousands of dollars are the subject of individual transactions.

For example, even if you gift your $500,000 apartment to a child for half price, that's a $250,000 asset that's divested in one transaction. Spread that across a whole estate and the value quickly skyrockets.

For others, however, gifting is a way of making sure assets are divided among beneficiaries exactly as they want them to be.

When it's done appropriately it can be a great form of succession planning.

For example, an elderly lady lent money to her adult daughter in order to help her renovate the mother's house. With the renovations were complete, the elderly lady then gifted half of the house to her daughter.

Scenarios like this are becoming increasingly common, and it's simply because it can be a great way to prepare your estate. However, those considering going down that path really need to carefully consider the full picture as there are a number of vital factors to consider.

Both the donor and the recipient need independent advice and there are documents to be drafted including a deed of the family arrangement, the commercial deal and the family succession arrangement, before the transaction can even take place.

There is some litigation risk that's present in these transactions with potential challenges based on lack of capacity or the donor being subject to undue influence.

Revenue considerations such as capital gains tax and stamp duty are also taken into account.

But while assisting family members with capital or assets is one driver behind gifting, concerns behind family provision applications is another motivator.

In most states, the court only has the power to make decisions on challenges to the will based on what assets form part of the estate in question.

So, orders in provision claims cannot be made regarding assets given away by the deceased during their lifetime as they're no longer in the estate.

The most effective asset protection strategy is to not own anything.

Joint ownership, death benefit nominations in superannuation, and outright gifts are some strategies people use to minimise the value of estates that otherwise could be exposed to a family provision application.

But whatever strategy someone is using to rid themselves of assets, those involved need to be aware of the risks of the strategy to the gift is upheld.

The main areas of challenge are usually that the donor lacked necessary capacity to understand what they were doing and the decision to gift was made as a consequence of undue influence or was unconscionable.

Other reasons gifting might be considered:

  • the transfer of property in consideration for the recipient providing care and support in the latter years of
  • the life of the donor (granny flat options);
  • timely business succession;
  • benefiting charity (or others) during one's lifetime rather than on death;
  • ensuring Centrelink asset test conditions are met for pension entitlements; and
  • gifting assets to a disability trust to protect the interests of a disabled dependent.

Note: Originally published in Retirement & Estate Planning Bulletin, July 2015, Volume 18 No 6