Trusts and Estates
A common feature of asset plans is for people to set up a Family Trust with the intention of divesting themselves of assets, thereby improving their chances of being eligible for a Residential Care Subsidy (RCS).
The individual ("Settlor") or couple ("Settlors") sell the family home to the trustees at market value. These trustees then owe the Settlor/Settlors a debt equivalent to the home's market value.
As gifts of $27k or less did not attract gift duty prior to 01 October 2011, the Settlor/s then usually gifted off the debt at the rate of $27k per year. Where it was a couple it was common practice for both spouses to gift $27k each annually.
When gift duty was abolished altogether in 2011 it became possible to forgive the remaining balance of such debt or to transfer assets directly to a trust without incurring any gift duty. However, that was a change to the tax laws only. There is much more to consider.
The Ministry of Health pays the RCS to the care providers. The Ministry also has to make policy decisions about the allocation of its overall resources. In the RCS space this is done through the provisions in the Social Security Act 1964 (the Act) and regulations made under the Act.
From a policy perspective Ministry of Social Development (MSD), which administers the RCS regime, has an issue with those who have gifted away their resources then being able to access an RCS. This subsidy was originally intended to provide a safety net for those who really needed it.
The current eligibility thresholds to 30 June 2018 at the two different rates are:
- Threshold A - $224,654.00 applies to every resident assessed as requiring care if they have no spouse/partner or if they do and both need care.
- Threshold B - $123,025.00 applies to every resident assessed as requiring care whose spouse/partner, does not require care. In this instance the family home and car are exempt. However, in these circumstances an applicant may choose to be assessed under Threshold A or Threshold B, a decision that will depend on the value of overall assets.
Household furniture, personal belongings and up to $10,000 for a pre-paid funeral expenses are exempt from the asset test.
The social welfare legislation treats couples as an economic unit for this purpose. This is potentially significant for couples where an applicant and the spouse/partner entered into a Relationship Property Agreement (RPA) which classifies property as separate in the event of separation or death. All property owned by the applicant and their spouse/partner is taken into account in a financial means assessment (FMA) regardless of what any PRA provides.
In the RCS space (in contrast to the tax space) the combined effect of section 147A Social Security Act 1969 (the Act) and regulation 9 (Long Term Residential Care) Regulation 2005 (the Regs) is that the allowable gifting level is $27k by a couple in any 12 month period up to 5 years before a RCS application is made. In the last 5 years before a RCS application, the allowable gifting is only $6k in any 12 month period.
All gifting in excess of these amounts will be treated as deprivation which means I will be added back in for the purpose of the FMA.
Not long after 01 October 2011 there was considerable confusion and legal debate over the earlier commonly accepted gifting regime whereby both spouses/partners gifted $27k each annually to their family trust. In many cases, particularly with older trusts, MSD did not regard the "extra $27k" as deprivation and approved the RCS application where there had been gifting of $54k each year. In other cases MSD would clawback the additional $27k.
This lack of consistency was due to two factors, one having its basis in law, the other in MSD's application of policy.
- "Deprivation" is a social security concept created by statute. Section 47A of the Act gives the Chief Executive a discretion to add back assets or income if the Chief Executive is satisfied that the person applying or the spouse/partner has "directly or indirectly deprived himself or herself of any income or property (other than an exempt asset).
- When interacting with MSD the frontline staff, such as case managers and processing officers, hold the delegated decision making power. This can result in different decisions despite comparable scenarios. With some of the older trusts where couples gifted $27k each annually, MSD is adding back in the second $27k, whereas in others it is not. The former approach is consistent with current social welfare policy.
Whenever you are undertaking an asset planning exercise, it is vital that you understand not just the choices, but the potential implications of those choices. Furthermore, as evident from the above, the implications of decisions also need review from time to time as the law and in the case of MSD policy guidelines change.
In particular you need to seek advice from us about the implications before gifting assets to trusts or family members.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.