Trusts and Avoidance of Rest Home Fees

By | February 15, 2013

All quite tricky

It was very common in the 1990s for New Zealanders to set up discretionary family trusts in the hope that by putting assets in the name of a trust, they could qualify for rest home subsidies in the event that they were required to go into rest home care. This certainly worked for a number of years. Things have changed, however, and this article looks at a recent case that challenged that proposition.

Several years ago the rules were changed and it is now much more difficult to use discretionary family trusts to avoid liability for rest home fees. The Ministry of Social Development’s interpretation of these rules was recently challenged in the High Court in B v Chief Executive of the Ministry of Social Development (see footnote 1).

Background

Mr and Mrs B established the B Family Trust in 1987. They were the primary beneficiaries and their children and grandchildren were also beneficiaries. The trust purchased properties in Auckland, Kumeu and Sydney. Mr and Mrs B made loans to the trust. They were owed more than $900,000.

That debt was forgiven by Mr and Mrs B each gifting $27,000 to the trust each year from 1987-2004; that is, Mr and Mrs B gifted a total of $54,000 each year from 1987-2004 and the debt was cleared.

In March 2009 Mrs B moved into a rest home and applied for a residential care subsidy. To decide whether she was eligible, the MSD conducted a financial means assessment to ascertain if her assets exceeded $180,000 in 2009. The threshold as at 2009 was $180,000 but it has since increased to $213,297.

Under the new rules, gifts in excess of $5,000 in each of the five years preceding the application for the subsidy (2004-2009) are taken into account. In the years before that (1987-2004) Mr and Mrs B were entitled to give $27,000 each year. Gifts above those levels are treated as assets that you have retained in your own hands.

The MSD assessment

The Ministry decided that during the 2004-2009 gifting period a total of $25,000 was allowed but, as Mr and Mrs B had gifted $54,000 on 25 June 2004, their excess gifting was $29,000 for this period. This amount was therefore included among Mrs B’s assets for the purposes of her application. More significantly, the Ministry assessed that Mr and Mrs B’s gifting between 1987-2004 totalled $918,000 but the Ministry allowed only $459,000 for this period so that the excess gifting for this period was $459,000.

The Ministry assessed therefore that Mrs B had assets in excess of the threshold of $180,000 and wasn’t eligible for a rest home subsidy.

The Ministry’s assessment was challenged in the High Court but the challenge was unsuccessful. The principal issue was whether when assessing one person’s assets, account can be taken of gifts made by a couple rather than just by the individual applicant. In other words, was the Ministry correct in taking into account the gifts made by both Mr and Mrs B, rather than just Mrs B’s gifting when calculating Mrs B’s assets? The Ministry’s interpretation was upheld and its decision was not disturbed.

It isn’t clear whether there will be a further appeal from this decision. For the present, however, where a couple has both gifted to a trust and one of them applies for a rest home subsidy, the gifts of both parties will be taken into account in assessing the assets of the applicant. This may appear harsh because many of these arrangements were made long before the rules were changed.

On the other hand, many (including the government) take the view that if assets are available then they should be used to meet rest home fees and the State should not be liable to pay expensive rest home fees when funds are available. It is possible to transfer assets to a trust and to qualify for a subsidy. The rules, however, are very technical and the slightest slip can mean you don’t qualify. Trusts established in the past are unlikely to meet the current requirements.

Footnote 1 = [2012] NZHC 3165

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Copyright, NZ LAW Limited. Editor: Adrienne Olsen. E-mail: adrienne@adroite.co.nz. Ph: 029 286 3650.

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