Gifting your house to the trust, does it really work?

natural-gift-box-red-bowThe transfer of homes into trusts is common place. It is done every day. People do it to protect their assets, to create a distinction between the entity owning the significant assets and the person taking on board liabilities. Abolishing gift duty will make the transfer of assets easier and avoid the need for long term gifting programmes that generally accompany the transfer.

A Supreme Court decision in 2008 considered this type of arrangement and has called for a re-think of just how much protection the trust does give. The decision was made before the new Property Law Act was introduced but that act in itself raises similar issues.

Mr & Mrs Lightbody sold their home to their family trust in 1998. A gifting programme was established and a first gift made immediately. This is exactly how many transfers to trusts are completed.

Mr Lightbody ran a jewellery business. Some time before the transfer of the home, he had given a guarantee to a supplier. When the house was transferred to the trust Mr Lightbody did not tell the supplier about that transfer or the on-going gifting.

The jewellery business was subsequently put into liquidation, owing the supplier a considerable sum.

The supplier obtained a judgement against Lightbody but was not able to recover what was owed. Mr Lightbody was bankrupted. The supplier then took action to set aside the transfer of the house. By the time this action was taken it was at least 5 years after the transfer of the trust had been completed.

The Supreme Court determined the supplier should be successful and declared that the trustees of the trust were to transfer one half of the property from the trust to the Official Assignee for the benefit of Mr Lightbody’s creditors.

The Court examined whether there had been an “intent to defraud”, and decided there had been. The financial position of both the business and Mr Lightbody were described as precarious, the transfer was kept secret from the supplier and the only adequate explanation for the transfer was protection from creditors.

Any transfer of property made since the beginning of 2008 will be subject to part 6 of the Property Law Act 2007. When gifts are no longer subject to duty it will be especially important to carefully consider this part of the Act. It provides that if property is gifted by someone who is insolvent, the gift can be set aside by creditors. There is no need to show intention to defraud.

Lessons to learn from this case and the changes to the law

  • When gifting assets to a trust consider existing actual and contingent liabilities.
  • If someone is not able to pay their debts when they are due, they will be insolvent.
  • A gift by an insolvent debtor can be reversed.

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