We are often asked by clients about Residential Care Subsidies and what they should do about gifting to their trust.
Trusts and Gifting
Gift duty was abolished from 1 October 2011. Before then, when a family trust was set up, family assets such as the family home would be transferred to the Trust, with a debt owed by the Trust back to the person who transferred the assets to the Trust. That “debt” was then “gifted” to the Trust each year at the rate that was the maximum allowed before gift duty had to be paid to the Government. That was $27,000 per annum per tax payer. Since 1 October 2011 it has been possible to gift assets to a trust instantly without needing to create a debt for the value of the asset and then gift away that debt.
Gifting and Residential Care Subsidies
Residential Care Subsidies are available to people who are aged 65 or older who need long-term care in a hospital or rest home and do not have the means to pay for such care. Eligibility is means tested as to both assets and income. The Government’s view is that people should not receive assistance when they have the means to support themselves. The residential care subsidy scheme is administered by the Ministry of Social Development and they take a hard line when they think there has been a voluntary deprivation of assets.
The abolition of gift duty did not change the rules about eligibility for residential care subsidies. According to the rules, an “asset” includes gifts that were made at any time in excess of $27,000 per couple. Additionally, in the five year period up to the date of the assessment, the annual threshold for gifting is $6,000. Gifting above that amount is deemed to be ‘excess gifting’ and will be taken into account in the assessment. If you were gifting $27,000 per year (or $54,000 per couple) under the previous gift duty laws, $27,000 of each gift made in the five years prior to the application is considered excess gifting. Beyond the five year period prior to the application being made, the allowable annual gifting limit is $27,000 as an individual or as a couple. The Ministry of Social Development can look back at gifting as far as it deems necessary and can also consider “asset deprivation” which may have occurred at any time during a person’s life when they apply for a residential care subsidy. It is important to note that asset testing when one person goes into care is based on the assets that they and their partner own together.
Options for clients with Trusts
- Put gifting on hold: Some clients have minimal amounts owed to them by their Trust. Where the amount they are owed, when combined with other assets in their own name, is under the WINZ threshold, currently (as at 1 July 2016) $220,000 (in round figures), it may be better to do nothing or move to reducing gifting (see option 2).
- Reducing the annual gift: The Supreme Court has clarified the position regarding gifting since the repeal of gift duty. The previous understanding was $27,000 each or $54,000 for a couple. WINZ will now accept gifts of $13,500 per person with no clawback (ie $27,000 per couple).
- Completing gifting: For younger clients who have time on their side, annual gifting of the total debt, no matter how large, is possible even at $27,000 per annum ($13,500 each).
Every client’s circumstances are different and require individual consideration. We are experienced in reviewing client’s circumstances against the criteria and can help you.