A huge number of New Zealanders set up family trusts, usually with a gifting programme in favour of their trust so as to transfer assets. We have seen estimates as high as 400,000 New Zealanders who have done so. By these means, assets are transferred into their trust, which cares for them during their own lifetime and their surviving spouse or partner thereafter, and then has funds to provide for family members.
Trusts are used for a variety of asset planning purposes. One of their key benefits and a purpose for which they are widely used for is protection against creditors, to ring-fence and protect personal assets if a business or individual is liquidated or declared insolvent and family reasons. Protection of trust assets from a residential care subsidy perspective is the focus of this article.
The manner in which your trust has acquired assets is the crucial question in ensuring protection against creditors from a residential care perspective. While certain recent or otherwise fraudulent disposals made to the prejudice of creditors may be set aside, good faith disposals to your trust may not be affording you the protection you think that they are if your disposal and asset transfer has been structured on a gifting basis.
A structured gifting programme of assets to your trust may result in your assets remaining within your current or future creditors grasp. It’s important to bear in mind that creditors aren’t just your current lenders, you may incur substantial claims, liabilities or debt in the future which may not currently be foreseen...
Gifting - why do people do it - from a residential care subsidy perspective
Historically people carefully structured their gifting (i) prior to 1 October 2011 to minimise their gift duty payments; and (ii) to manage their asset value and to ensure that they qualify for residential care subsidies and to prevent their disqualification from subsidised hospital or residential care in terms of the Social Security Act (essentially if you don’t do a gifting programme and instead you give a lot to a trust at all at once then that may be clawed back and reversed by the state to pay for your rest home care).
If carefully planned it is possible to fall within the benefits of the Social Security Act and we can advise you on this. However, given the current threshold and value of residential property, the average Kiwi will exceed the threshold without the most carefully planned gifting regime, which would need to be in place for likely decades – which many are and that is great. However, if only once you hit retirement you start thinking about this asset protection measure, then that may be too late.
For persons 65 and older yours and your partner’s personal assets must be *$239,930 or less (*as at the date of this article, there will be inflationary increases in time) to qualify for rest home care subsidies. While this threshold excludes certain assets such as pre-paid funeral expenses, clothing, jewellery, furniture and household effects, the vast majority of your assets are included for determining the value including your immovable property, vehicles, cash, savings, bonds, investments, shares, life insurance policies, loans made to people and your family trust, boats and caravans are all included.
Gifting to get a residential care subsidy - is it worth it?
If you’ll be able to structure your assets to fall below the threshold, you may qualify for rest home subsidies offered by the government, currently up to $60,000 per annum –On the other hand it is unclear if this subsidy will still be in place at the time of your retirement, what the threshold will be then, or if by then the care will be limited to designated facilities you would not have otherwise chosen for yourself. There is also a lot of record keeping to be done over the years which will need to be kept and shown to prove that your gifting was done correctly.
In terms of current tax laws you will not pay donations tax on your asset disposal into your trust. Unlike the position pre-October 2011 and which may well be the position again the future, depending on a change in policy on laws.
On a balance if your trust is not the owner of your assets, you are losing out on a key benefit of asset protection from creditors. You are also exposing yourself to the risk of gift duty, or ‘death taxes’ or estate duty should the same be implemented by a change in laws in the future.
In our view qualifying for the subsidy is becoming more challenging. Whether it still makes sense to establish a trust with the hope of qualifying for rest home subsidy alone largely depends on your specific circumstances, assets, and several other factors.
Note however, that there are still many other reasons to have a trust, for instance risk mitigation for people in business, mixed families and general estate planning.
In addition, if you already have a trust and a gifting programme in place, we would strongly advise that you consider all the risks and benefits of winding up your trust, as you have already done a lot of the hard yards and there are so many uses for a trust that you may not even yet be aware of. We can talk through these with you.
Other considerations to bear in mind...
Firstly, keep in mind that even if you have a great gifting programme and you do/would qualify for a residential care subsidy once you are at that stage of your life, will you even need it?! In New Zealand many people do not ever need rest home care and instead pass away while still living at home. On average, for the people that do go into rest home care, they are usually around their mid-eighties, and only stay in rest home care for around one and half years.
Secondly, a trust is not at all the same as you personally (whether or not you are a trustee and/or beneficiary of that trust). A trust is an entirely separate entity. Setting up a trust and gifting money into a trust therefore has its own set of rules and considerations - it is entirely different from say, transferring money from one of your bank accounts to another of your bank accounts.
Protect your assets, trust your trust
Contact us to help you with your estate planning and trust asset structuring.
ASCO Legal can guide and assist you in determining the current position of the assets you and your trust owns as well as any gifting or lending regime you may have in place and whether your trust satisfactorily owns the assets in question.
We will advise you on the steps to be taken and assist with in transferring your assets into your trust in a manner best suited to your unique circumstances. We look forward to hearing from you.
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The information posted on this website is prepared for a general audience, without investigation into the facts of any particular case. This information is no substitute for legal advice and does not create a lawyer-client relationship; you are advised to consult with a lawyer on any legal issue.