Are Gift & Loan Back Strategies now DOA?
On 10 June 2022, the Supreme Court of Queensland handed down a decision in a matter called Re Permewan No. 2  QSC 114, which is likely to have a profound effect on certain asset-protection strategies adopted by a wide range of people.
Re Permewan centred around an attempt by an elderly lady to protect her assets from being contested by 2 adult children who she was excluding from her will. Ms Permewan died in 2019, and was survived by her son and two daughters. Her will appointed her son as executor and gifted him shares (and so control) over a trustee company, and gave the residue of her estate to a family trust. When she died, Ms Permewan owned nearly nothing in her own name; whilst she was alive, she had transferred her assets to a family trust, by way of the following transactions:
- Firstly, Ms Permewan ‘gifted’ $3 million to her family trust, by way of a promissory note.
- However, the family trust then ‘loaned’ $3 million to Ms Permewan, by way of a loan agreement. The family trust secured that loan by taking a mortgage over Ms Permewan’s home and shareholdings.
The daughters (who had been excluded from Ms Permewan’s will) sought to invalidate those transactions, thereby returning the $3 million ‘gift’ back to Ms Permewan’s estate, from which they sought an order for further provision from their mother’s estate.
The Gift & Loan Back Strategy
The idea was to deplete Ms Permewan’s net value, so that she would own nothing of value when she died. If her estate was of minimal value, or insolvent, then her daughters were unlikely to be successful in contesting her will and seeking further provision from her estate.
Whilst the purpose of the Gift & Loan Back strategy was to deplete the value of Ms Permewan’s assets at law, it wasn’t intended to practically diminish her assets. So whilst she had ‘gifted’ $3 million to the trust, it was immediately returned to her by way of a ‘loan’ so that she could continue living in the exact same manner as before. As the court observed, Ms Permewan did not even have $3 million in cash that she could ‘give’ to the family trust, and family trust did not have $3 million that it could ‘loan’ to Ms Permewan.
As is probably clear from the above, the Gift & Loan Back strategy may be somewhat of a ‘legal fiction’. There wasn’t any actual gift, nor any actual loan; it was all theoretical (albeit legally documented). The court ultimately made a finding that the whole transaction in Re Permewan had been a sham, with no real intention by Ms Permewan nor the family trust to actually create legal rights and obligations. Ms Permewan never really intended to repay the ‘loan’, nor would the family trust ever require that it be repaid or otherwise enforce the loan.
Whilst the Gift and Loan Back strategy ultimately failed in Re Permewan for a technicality reason (failure to deliver a promissory note), the court stated that it was confident that the transactions would successfully be overturned as being contrary to public policy. That is, the transactions were simply intended to circumvent important actions allowed by legislation (namely a family provision application by eligible persons who may not have received proper maintenance and support from a deceased’s person’s estate).
The effect of this case is not to declare Gift and Loan Back strategies null and void in their entirety, however it does demonstrate that the court is willing to see past sham transactions to ensure that legislation and public policies are not rendered obsolete by illusory legal transactions.
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