Family Provision vs Gift and Loan Back Strategy

The Supreme Court of Queensland has twice recently considered the implications of the “gift and loan back strategy” which is a common device whereby a person makes a gift of a substantial amount of money to a trust, which gift is made through a loan from the trust, and secured against the assets of the gift maker.  The transaction sets out to achieve the reduction of the equity that the gift maker has in their own assets, with the corresponding increase in the equity owned by the trustee of the trust, for the trust. 

Generally, this device is used in asset protection strategies, but also it has been used to reduce the equity of a person in their own assets as part of estate planning, with a view to reducing the overall size of an estate capable of being fought over in family provision claims which are made under the Succession Act – for example, when the Will maker wants to give all of their assets to one child and not another. The underlying intention is to reduce the amount of the estate available for claims to be made.

Such a strategy was considered in the matter of re: Permewan, first in May 2021 and second in June 2022.  The first decision related to an application to remove the executor so that an independent person could be appointed to investigate whether the gift and loan back strategy was a sham and should be set aside as not being binding on the estate (which would have the result that the estate would be larger, and then the disappointed potential beneficiaries would potentially share in the larger estate when making claims for further provision).  Orders were made in that application for the removal of the executor and the appointment of an independent person as administrator to the estate to allow for the investigation of the dealings.

Subsequently, there was litigation over the validity of the documents comprising the gift and loan back strategy.  Ultimately, the parties agreed that due to a deficiency in the way in which the transaction was carried out, it should be set aside.  That said, the question of the merits of the strategy itself was considered in relation to an argument over costs and His Honour Cooper J gave a detailed judgment delivered on 10 June 2022 considering the merits of the transaction in the context of whether or not costs should be ordered.  His Honour found that –

  1. having regard to the evidence and the documents and in particular having regard to the intention which was clearly and obviously intended to take effect on death (to achieve the protection against family provision claims), the transaction was almost certainly to be a sham;
  1. perhaps more importantly, the enforcement of the transaction would be contrary to public policy because the effect of carrying them out would be to defeat or circumvent the public policy upon which the family provisions of the Succession Act are based, and would thereby be generally regarded as injurious to the public interest. 

As a consequence of these matters, there is potential that attempts to manage family provision claims by reducing the size of the estate through the use of a gift and loan back strategy will be attacked and potentially set aside, with significant cost risks to any party seeking to enforce it. 

For advice regarding estate planning, please contact Peter Muller at peterm@qbmlaw.com.au or Jessica Murray jessicam@qbmlaw.com.au