Revolving credit mortgages leave trusts in a spin
10 November 2006
Revolving credit mortgages leave trusts in a spin.
Thousands of mortgage customers with trusts are creating gift duty liabilities for themselves without even realising it. At the same time they are often unwittingly increasing the chances of their trust being challenged as a sham.
Splitting mortgages between a fixed rate mortgage and a revolving credit facility has become an increasingly popular trend over recent years. These facilities work by allowing customers to deposit money as it is received then withdrawing it as required. As well as providing the flexibility to redraw from ones mortgage there can be significant interest savings over the term of a mortgage for those disciplined enough to manage them well.
With billions of dollars worth of fixed rate mortgages maturing over the coming months it is likely that some of this borrowing will be switched to revolving credit mortgages. When the mortgage involves a trust, care needs to be taken to structure things correctly and ensure that deposits and withdrawals are managed appropriately.
Customers need to be aware that every deposit made to a revolving credit facility operated within a trust can be assessed as a gift unless it is documented otherwise. Gift duty becomes payable when total gifts exceed $27,000 each year and progressively increases until it reaches 25c per dollar gifted. For customers already involved in gifting their home to the trust the duty liability can mount up very quickly.
By way of example, Don and Helen are both on salaries of $60,000 per annum. They are currently gifting their property to a trust and depositing their net salaries to their revolving credit facility. Their combined gift duty liability could be as high as $11,865 per annum, much more than any interest savings are likely to be.
“The lack of education by advisors around how trusts need to be managed after they are established is creating these risks and many others” says Mark Maxwell, Chief Executive for Trust Management Specialists - Integrity Trust Limited.
In addition to gift duty risks trustees may also find they are providing those seeking to challenge a trust exactly the type of evidence they need to have the trust ruled a sham. This could prove to be far more costly than any duty liabilities.
In order to avoid costly mistakes customers are best to involve both their trust advisor and mortgage broker or bank whenever they are considering financing options. For those with existing revolving credit facilities within a trust, Maxwell strongly advises a thorough review be undertaken to ensure liabilities have not been unwittingly created.
Mark Maxwell is Chief Executive and co-founder of Integrity Trust Limited (www.integritytrust.co.nz), a company specialising in trust management. Mark has extensive experience in the trust industry after a 17 year career with Public Trust where he held a number of senior roles, including General Manager of Charitable Services and National Manager, Trustee Services Development.