Monday, February 20, 2017

Gift and Loan Back Arrangements – A Practical Example

Earlier posts have looked at various aspects of ‘gift and loan back’ arrangements – see -

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers some related practical issues in relation to gift and loan back arrangements in a ‘vidcast’ at the following link -

As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –

Having done the trust split, what you might look at doing is a gift and loan back. That is to say the trustee that sits over a split trust will arrange for assets that are equal to the underlying interest in the asset to be gifted into a brand new trust.

The new trust will generally be a stock standard family trust that's controlled by the relevant beneficiary.

If the split trust makes a capital gift of the underlying capital value, not the interest in the asset itself, then what is being gifted is the dollar value of the asset as a cash gift. It can be a promissory note, round robin of cheques or whatever it needs to be.

The funds are gifted into a trust that’s controlled by the relevant beneficiary. What the beneficiary then does is lends that money back into the split trust.

That is step 1 is the gift.

Step 2 is the loan.

But at the same time as that new trust is making that loan, it will also take a mortgage out over the underlying assets in the split trust.

Thus you have effectively synthetically moved all of the equity out of the split trust into a brand new trust, which is absolutely controlled by the relevant beneficiary.

Furthermore, there's no mortgage duty on a gift and loan back arrangement. In other words, you can do all of the gift and loan back arrangement without any transaction costs.

The beauty of the strategy is that it still maintains the integrity of the initial trust split, but gives each of the ultimate family members, no matter what might go wrong between the family at that split trust level, the ultimate ability to call in that debt. While they might actually have to sell the underlying asset at that point, they will still ultimately have the underlying equity where it needs to be (that is in their sole control).