Why do people form Family Trusts?
People form family trusts for a wide variety of reasons – most commonly these tend to be for the purposes of:
- protecting personal assets against business risk;
- maintaining control over the distribution of assets within a family after death; or
- safeguarding against relationship property claims.
We also receive enquiries from clients from time to time asking whether a family trust can assist in preserving their eligibility for rest home subsidies should they need care in the future. We have always stressed that this has never been a particularly good “primary” reason for forming a family trust – though trusts have on occasion proved useful for this purpose.
However, the policy approach to trusts taken more recently by the Ministry of Social Development (MSD) – backed by a decision of the New Zealand Court of Appeal – means that trusts are becoming less and less effective when it comes to rest home subsidies.
Background
Before gift duty was abolished in 2011, it was common for people to sell their home to a family trust in exchange for a “debt” back to them for its market value. While the debt remained a personal asset, this was then forgiven (or “gifted”) in annual increments of $27,000 per person (or $54,000 per couple), being the maximum amount a couple could gift without incurring gift duty.
This proved a reasonably effective method of transferring assets from personal ownership to trust ownership. Once a debt was forgiven in full, the home could be excluded as a personal asset when an application for a rest home subsidy was made – with the effect that some people then met the asset thresholds for obtaining a rest home subsidy (currently $224,654).
The annual “cap” on gifting meant that it still took considerable time for the trust to obtain outright ownership of the assets – for example if, including property and business interests, a couple owned $1 million of assets, it would take nearly 20 years to forgive this debt in full.
Once gift duty was abolished, while larger gifts were now permitted, the $27,000 per annum gifting restriction remained in force under the Social Security Act 1964. Hence for those couples wishing to preserve their future eligibility for a subsidy, it was business as usual. Or so many thought…
Bridgford v MSD
In 2013, the Court of Appeal in the case of Bridgford v MSD* determined that the maximum amount a couple could gift in any year was in fact $27,000 per couple, and not $54,000. This has effectively doubled the length of time it would take a couple to transfer their personal assets to a trust.
For those who had up until Bridgford been gifting an annual amount of $54,000, the “excess gifting” over and above $27,000 would be considered a “deprivation” of the couple’s assets at the time an application for a rest home subsidy was submitted – these amounts would then be added back to the couple’s personal assets, and if the asset threshold was now breached, they would be denied a subsidy.
On top of this, allowable gifting carried out within the five-year period prior to a person or their spouse going into rest home care is capped at $6,000 per annum. So if you happened to still be gifting $27,000 per year at any time within those five years (and bearing in mind that calculating when you might require care is not something you can generally predict in advance!), $48,000 in each of those 5 years (so $105,000 in total) would be added back to your personal assets.
Effect of the Bridgford decision and MSD policy
The Bridgford decision issued around the same time as MSD were increasing the rigour applied to applicants who had transferred assets to a family trust. It would be fair to say that vigilance has continued unabated since Bridgford, the effects of which now include:
- Even where clients’ assets are largely comprised of their family home, the length of time now required to effectively divest themselves of assets has in many cases proved a disincentive for clients forming a family trust for this purpose.
- Established trusts with a long history of gifting at $54,000 per annum (pre-Bridgford) may discover the process has been ineffective for the purposes of qualifying for a rest home subsidy, such that it may even be advisable to wind up the trust.
- Where clients own few assets over and above the trust property, having a trust can even put you in a worse position than if you did not. This is most commonly seen where one client goes into rest home care and their spouse is still living in the trust property. In these circumstances, one of the asset threshold options – which allows the “family home” to be disregarded in assessing the couple’s assets – is not available, because the home is owned by a trust, and is no longer their “home”. We have seen this cause major distress to clients, particularly where they have few other savings to fund their rest home care.
- There are other “tools” open to MSD in denying clients who have a family trust a rest home subsidy. So in addition to asset-testing, MSD may also determine whether the applicants have, by placing assets into a trust, denied themselves of any “income” they could have derived from those assets. This again has implications as to the extent to which clients are required to pay for their own rest home care.
MSD have a clear policy directive to ensure that where people have recourse to assets or income (whatever the source), they use those assets to pay for their own rest home care. In light of this policy – now backed by the New Zealand Courts – MSD’s approach to trusts is likely to become increasingly “combative” – and those relying on family trusts to obtain a subsidy could well end up disappointed.
Family trusts may of course still prove useful for purposes unrelated to rest home subsidies. Indeed, the abolition of gift duty has in many circumstances allowed much larger gifts to be made to family trusts than had previously been the case. In addition, depending on the level of gifting/potential deprivation, in some circumstances trusts may still prove effective in preserving a person’s eligibility to a subsidy.
The application of the Social Security Act and its Regulations is a complex matter. If you have a family member who has transferred assets to a family trust and that family member might shortly require rest home care, or are considering forming a family trust because of concerns over your future eligibility to a rest home subsidy, we would encourage you to contact our office to discuss.
Every situation is unique so please discuss your situation with a professional advisor who can provide tailored solutions to you. Please contact Tim Rankin timrankin@parryfield.com or Kris Morrison krismorrison@parryfield.com at Parry Field Lawyers (03 348 8480)
*Bridgford vs Chief Executive of the Ministry of Social Development [2013] NZCA 410.
