Are gift and loan back transactions a sham?

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If legal asset transfers can be defeated…

A common asset protection strategy is to transfer assets from centres of risk to recipients who are risk-free. The transfer of assets from a business owner to a spouse who is not involved in that business is a common example.

But these arrangements are not necessarily effective. For instance, they can be voided where their purpose is to defeat creditors, including where the transfer predates the liabilities by many years (see Turner v Wallace [2016 FCAA 963]).

…then what hope do sham transfers have?

According to the recent decision in Re Permewan (No 2) [2002] QSC 114, similar principles may apply to ‘Gift and Loan Back’ arrangements.

Broadly, these arrangements involve a party transferring their wealth to a de-risked related entity in the expectation that the wealth will be leant back immediately.

In Permewan, the estate of a matriarch named Prue was gifted to a family trust by way of promissory note. Prue had three children, including one son.

Prue’s estate was worth approximately $3,000,000. Having made the gift, Prue then “borrowed” $3,000,000 back from the trust, granting registered securities over her home and assets to the trust as collateral.

It is important to note that no money ever changed hands.

Arrangements fail for technicalities but also in substance

If effective, these transactions would have gutted Prue’s estate and isolated her wealth in the trust, which was controlled by her son to the exclusion of her daughters. The estate was now worthless, and any action by Prue’s daughters contesting her will would serve little purpose – the wealth was now elsewhere.

In Permewan, the above arrangement was defeated because of procedural deficiencies concerning the promissory note. However, the Court also indicated that the transfer would likely have been defeated as a sham.

The court cited previous authority on what constitutes a sham. In Australian law, a sham is ‘something that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front.’

Whether in estate planning or commercial matters, parties should therefore carefully consider any ‘Gift and Loan Back’ arrangements, particularly where no money has changed hands.

Aintree Group Legal are happy to discuss your estate planning and commercial legal needs. Contact us today!