In this edition of ‘It depends’, senior associate Steven Jell looks at recent developments regarding gift and loan back strategies. Steven will be presenting a webinar with Clinton Jackson and Keeghan Silcock on this topic on 4 August. Register now.
Hi. Welcome to this edition of It Depends. Today, we’re going to look at some recent developments regarding gift and loan back strategies.
What is a gift and loan back strategy?
In its simplest form a gift and loan back strategy is transferring the value of an asset from an individual to another entity, usually one that they control. So, the value of the asset changes, but the underlying registered ownership remains the same.
How does it work?
So, the first step is to determine the asset that we’re looking to protect and the underlying value of that asset itself. Once we know those things, the registered owner of that asset then gifts the sum of money equal to the value of the asset to another entity, usually one that they control. That entity then loans back the same amount of money that it received and takes security over the asset that we’re looking to protect. So, this has the practical effect of shifting the value of the asset but the underlying registered ownership does not change.
Why use a gift and loan back strategy?
So, it depends. There’s usually two reasons why people look to implement a gift and loan back strategy. The first is asset protection, where an individual looks to reduce the value of the assets they have in their own name to prevent creditors attacking those assets. The second is estate stripping, where someone looks to reduce the value of the assets in their estate following their death to avoid some estate litigation risks.
So, there’s been a couple of recent cases in Queensland where a gift and loan back strategy was used to reduce the value of assets in an estate. Essentially the deceased looked to move the value of their assets out of their personal name to reduce the risk of her children making a family provision application. The deceased didn’t have enough cash to make a gift. In the first instance they used a promissory note and a promissory note is essentially a promise to pay an amount of money later or upon demand. And what happened after the deceased’s death was that there was lengthy court proceedings and the outcome in those proceedings were that the transactions themselves were in fact invalid.
What does this mean?
The use of a promissory note to complete a gift and loan back strategy has always had a level of inherent risk. Our view is that it’s always better to transfer cash when trying to implement a strategy like this. Without it, there’s a real risk that the transactions themselves will be ineffective.
Can a strategy like this still be effective?
So, it depends. Done properly, a gift and loan back strategy can still be a really effective planning tool. There are many different issues to consider before jumping in and preparing a strategy like this. We are running a webinar on the fourth of August to run through the issues and make some recommendations when implementing a gift and loan back strategy. Please register now. Thank you for watching this edition of It depends.