what is a gift and loan back?

A gift and loan back arrangement allows the net equity in an asset to be securitised by a related entity for asset protection purposes.

A diagrammatic overview can be shown as follows:

when might this be used?

This sort of arrangement can be effective where there is a need to manage risk or otherwise remove the value of your assets, out of your name.

This is most commonly used:

  • for ‘high risk’ individuals that own assets in their own name [either for tax purposes or from poor asset protection advice]. For clarity, ‘high risk’ broadly includes persons that are at a higher risk of being sued or otherwise having their assets the subject of creditors;
  • as a part of an estate planning strategy to minimise assets forming part of a person’s estate [when there is no connection with New South Wales due to special rules applying there].

The arrangement has been subject to some scrutiny over the years, making it critical that specific advice be sought from your advisory team. The biggest area this comes under fire with issues such as bankruptcy

Generally speaking, there are broad powers under bankruptcy law allowing creditors to ‘claw back’ transfers you have made within a certain time period from you being declared bankrupt, so that they can access the assets. Depending on the transfers, these could be clawed back at different times, most commonly as far back as 4-5 years from when bankruptcy is declared. Where however the transfer was done for the purposes of avoiding creditors, there is no limit on time.

It is therefore important to proactively consider if one of these arrangements might be appropriate in careful consultation with your advisors, so that the time limits ‘start ticking’ and reduce the likelihood that the arrangement will be unwound.

does it actually work?

Provided the arrangement is done for proper purposes and outside those timeframes, several cases have shown the effectiveness of such arrangements.

Case examples

1. Atia v Nusbaum [2011] QSC 044

Dr. Atia [a surgeon and therefore ‘high risk’] entered into a gift and loan back style arrangement with his mother.

Dr. Atia argued [when his mother subsequently called in the debt due to what he as his mother’s disapproval of his relationship], that the loan and mortgage were not intended to be actually binding and were only a pretense to protect against situations where Dr. Atia was sued professionally.

Unfortunately for Dr. Atia, the court found that all aspects of the legal documentation, [including a deed of gift, loan agreement, and registered mortgage] had been validly prepared and executed – there was no mistake or sham involved – and Dr. Atia’s mother was able to call on the debt.

This case shows how effective the arrangements can be, but also the importance of receiving advice regarding who the funds should be gifted to and loaned from.

2. Pelly & Nolan [2011] FMCAfam 530

Mr. Pelly’s father advanced approximately $520,000 to assist his son.

There was an initial advance [of which was $320,000] to assist the son to purchase a property. This was supported by a loan agreement. Further advances were also made totaling approximately $200,000 [to assist with general living expenses].

Mr. Pelly was separating from his wife. His wife’s representatives were arguing that the amount was a gift, and therefore formed part of the pool of matrimonial assets. Mr. Perry’s representatives claimed the amount was properly categorised as a loan [as it had to be repaid and was documented as such] thus reducing the pool of matrimonial assets.

Evidence has been presented that Mr. Pelly’s father did not seek repayment of the further advances [$200,000] and only sought repayment for the initial advance [$320,000].

The court held that the initial advance [$320,000] was enforceable, due to the presence of the loan agreement and it being for a specific acquisition. This was then to be deducted from the matrimonial assets.

However, the further advances [$200,000] would be included in the pool of matrimonial assets [and therefore available to Mr. Perry’s wife].

This case shows the importance of not only proper documentation, but the need for regular review of the circumstances to ensure whether documents need to be varied or ‘topped up’ to take into account any further advances.

the main take-outs here are:

  • The arrangements need to be carefully documented by your advisory team, with both your financial team and legal team working collaboratively to make sure the documents accurately reflect the circumstances;
  • The arrangement needs to be constantly reviewed to ensure any changes are accurately captured;
  • People need to be proactive about getting advice about the appropriateness of this sort of arrangement so that the clock starts ticking on bankruptcy clawback times.

For those that want to know more about what a trust is [as a possible related entity to use in this sort of arrangement], watch this.

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