Residential care subsidy applications and trust reversals

Introduction

The 2011 abolishment of gift duty means that property or money of any value can be freely gifted by natural persons without any duty imposition.  However, gifting limits allowed under the Social Security (Long-term Residential Care) Regulations 2005 remain unchanged and therefore gifting property to a Trust or third party (or company) must be done with caution.  In some instances, where a home has been transferred to a Trust, the question is whether an applicant’s home should remain in the Trust, or be returned to the settlor prior to the application for the rest home subsidy.

The gifting limit

These limits are $6,000 per 12 month period in the five year gifting period before the date of assessment for a residential care subsidy, and $27,000 per year for each 12 month period prior to this. Where an applicant for a subsidy has previously gifted more than either of these limits, eligibility may be affected when applying for a subsidy.  

The Court of Appeal in B v The Chief Executive of the Ministry of Social Development [2013] held that these gifting limits apply per couple.  That is to say, if a couple gift a total of $54,000 ($27,000 each) to a Trust or third party, half of this may be included (i.e. “added back”) in an assessment by the Ministry of Social Development (MSD) if the gift is made outside the five year gifting period.  A gifting programme in the five years prior to the application being made can be entered into.  The yearly (12 month) limit imposed here is $6,000. 

A failure to accurately disclose all gifting may well result in a finding of “deprivation”. The MSD will take deprivation into account in an assets assessment, so it is vital that assets are disclosed. Deprivation may also be found where assets are sold at undervalue, finance is restructured so as to reduce the income or assets of the applicant, or ownership of property is transferred from the applicant to a third party.

Threshold and eligibility

Current Government policy is very much along the lines that if an individual has the resources to support him/herself in relation to residential care then he/she will not receive assistance from the State.  The MSD will assess each person on the basis of the value of his/her assets and his/her ability to pay.

There are currently two asset value thresholds for an applicant aged 65 years or older, which will render an applicant eligible for a residential care subsidy:

• Threshold A is $218,423 (including the value of the applicant’s house and car), and may apply if the applicant is single, or if both the applicant and partner are in long-term residential care;  
• Threshold B is $119,614 (not including the value of the applicant’s house and car), and may apply for a couple if only one spouse is in long-term residential care.  A couple eligible under threshold B will however, have the option of opting for threshold A instead, if they wish.

Certain assets are always excluded from an MSD assets assessment: personal belongings, such as clothing or jewellery; household furniture and effects; and pre-paid funeral expenses up to $10,000 in a recognised funeral plan.

Effect on a trust

These gifting limits create the anomaly that a settlor of a Trust may end up in a worse position having his/her home in a Trust, than that which would apply if they had never gifted away the property in the first place.  If the value of the gifting is above the limits set out above, this will be added to the applicant’s asset value when the assessment is conducted.  If the value is above threshold A, the applicant will not be eligible for a residential care subsidy.  An applicant in this situation is also unable to claim under threshold B for the personal home exemption, as the home is owned by the Trust.

There is however a silver lining: if “but for” the gifting of the home to the Trust, the applicant would have been below threshold B, a Trust reversal may be initiated.  This means ownership of the property in the Trust will be distributed back to the settlor of the Trust.  The settlor will be in the same position he or she was in prior to the gifting.  Such a situation will only arise if the applicant would have otherwise been under the threshold B value ($119,614), when totalling the value of his/her assets excluding home and car.  

Trust income

Aside from the assets assessment of the individual, MSD will also consider the income of the applicant in an income assessment.  Income from a trust is considered to be a form of deprived income. “But for” the Trust - the income would have been available to the settlor(s) of the Trust.  The current income thresholds for the year 1 July 2014 to 30 June 2015 are:

• Single applicant: $963 per year;
• Couple, if both are in care: $1,925 per year;
• Couple, if only one is in care: $2,887 per year.

MSD will look at the deprivation by the applicant settlor and may (and in most cases will) “add it back” to the financial means assessment.  This means that Trust income will usually be taken into account in any income assessment.  The MSD position is that an applicant should take all reasonable steps to maximise his/her income.

Conclusion

It is crucial that every applicant understands the range of choices available, and the implications of each of those choices, not only in the short term but in the later stages of life. Before deciding to gift property to a Trust, it is important to consider the size of the gifting, and how gifting will affect eligibility for a residential care subsidy. It is important to seek legal advice on the best approach to gifting assets, as future planning is essential, taking into account the implications of each option.

If property has already been transferred to a Trust, legal advice should again be sought to ascertain whether a Trust reversal should be commenced.  A number of factors need to be considered, including: what assets (other than the house) the Trust has; what assets the applicant has in his/her personal name (for the purpose of a threshold calculation); wider trust obligations; and the other implications of reversing the Trust. Other benefits in retaining a Trust may of course be relevant. All of these factors need to be taken into account to ensure that an informed decision is made.

If you would like further information please contact Gerard Rennie on 07 958 7422.