Monday, 6 August 2018
Author: Jillene Peters
Family trusts and gifting
It has been common for people to establish family trusts with the intention of divesting themselves of assets, to improve their chances of being eligible for a residential care subsidy.
A common scenario is for assets to have been transferred to a trust, with a debt equivalent to the value of the transferred asset being owed by the trust back to the person who set up the trust (the “settlor”). The debt is then gifted off at the previously prescribed rate (to avoid gift duty) of $27,000.00 per year. A debt owed by a trust to a settlor is an asset of the settlor.
After 1 October 2011 it became possible to transfer assets directly to a trust without the need for a subsequent gifting programme, or to forgive the entire remaining balance of a debt owed by a trust to a settlor.
Now it is also possible to gift assets to other people as well as a trust and not have to pay gift duty.
Asset limits for Social Welfare financial means assessment
The principle underpinning social welfare law is that people should not receive assistance from the State when they have the resources to support themselves.
The Ministry of Social Development (MSD) assesses whether a person aged 65 or over is eligible for a residential care subsidy on the basis of the value of his or her assets and financial means at the time of applying for assistance.
The eligibility thresholds are set at two different levels. Threshold A is $227,125.00 and applies to every resident assessed as requiring care: (a) who has no spouse or partner; or (b) whose spouse or partner is also a resident assessed as requiring care; or (c) whose spouse or partner is not a resident assessed as requiring care but who has elected to have Threshold A apply to him or her rather than Threshold B.
Threshold B is $124,379.00 and applies to every resident assessed as requiring care: (a) whose spouse or partner is not a resident assessed as requiring care; and (b) who has not elected to have Threshold A apply to him or her.
The thresholds represent value of assets. Certain assets are exempt: household furniture and personal belongings, up to $10,000.00 of pre-paid funeral expenses, and, if Option B is elected, the home and car.
Assets not included in the assessment are personal effects and an allowance of $10,000.00 for pre-paid funeral expenses.
Allowable gifting under the Social Welfare regime
There are limits on allowable gifting per application for a residential care subsidy prior to any application being made.
In the five years prior to the application being made, each applicant or his or her spouse may only gift $6,500.00 per year. Any gifting above that amount is deemed to be excess gifting and will be counted back in the assessment.
So, if you were gifting $27,000.00 per year to avoid having to pay gift duty under the tax laws, $21,000.00 of each gift made in the five years prior to the application is excess gifting and taken into account in the social welfare assessment.
Beyond five years prior to the application being made, the allowable annual gifting limit is $27,000.00.
After 1 October 2011, the amount of gifting allowed by MSD does not change. Therefore, if a large gift of assets is made after 1 October 2011, there will be a large amount of excess gifting taken into account by MSD in assessing eligibility for a care subsidy. If you make a one-off gift of $500,000.00 ten years before applying for a rest home subsidy, for example, the first $27,000.00 of that gift will be allowed, but the balance ($473,000.00) will be treated as your personal asset. Under the current rules, you would not be eligible for a rest home subsidy in these circumstances because you will be deemed to have a personal asset of $473,000.00.
When MSD assesses eligibility for a subsidy, applicants are required to make full disclosure of all assets, income, transfers of assets to trusts or family members, and all gifting, no matter how long ago. MSD has extensive resources and wide powers available to investigate an applicant’s financial circumstances and estate planning measures, beyond mere reliance on disclosure made by the applicant.
An applicant should not attempt to make himself eligible for a subsidy by giving assets away or selling them for an under-value, or by going without income or payment. This is known as “deprivation” and MSD can consider deprivation which may have occurred at any time.
It is very important to remember that the MSD can look back at gifting and deprivation devices as far as it deems necessary.
Whose assets are counted?
“Assets” for the purposes of assessment are assets of the applicant and spouse or partner, whether owned jointly or separately. This means that even if the applicant and spouse/partner have entered into a relationship property agreement which classifies certain property as “separate property” for the purposes of the Property (Relationships) Act, that separate property will still be taken into account by MSD in the financial means assessment.
When undertaking an estate planning exercise, it is crucial that you understand the choices available to you and the implications of those choices, not only in the short term, but also in the later stages of your life. A decision to divest yourself of assets may not prove to be a sound plan in the long run. Before gifting assets to trusts or family, you should talk to your advisors about the implications of doing this.
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