A year ago, when the Government axed gift duty, it appeared to open the door to the fast and easy transfer of family assets into trusts for those seeking refuge from creditors and rest home asset testing. In the past, moving a family home and other possessions into a trust was a slow business of drip-feeding assets to avoid gift duty. With the rule change, assets could be transferred in one hit.
But those hoping it would become easier to squirrel away capital for the next generation without having it hollowed out by rest home bills are in for a nasty surprise. In fact, the change to gift duty has masked a harder line from the Ministry of Social Development (MSD) in recovering rest home costs. The ministry is swooping on trusts to which people have transferred assets in one lump sum, and then sought a rest home subsidy. It says there have been a number of cases since the removal of gift duty in October 2011 in which “clients have made large one-off gifts and have then applied for subsidy”. And operating under the radar, the ministry has tightened a slew of other rules to target assets in long-established trusts.
The stakes are high – by 2014, long-term residential care for the elderly will cost the Government $1 billion a year. The result is that the old middle- and upper-income dodge of moving assets into a trust to avoid paying for rest home care is under siege. “The concern is people did these things in the 1980s and 1990s on one basis, and now the rules have changed,” says Wellington lawyer Greg Kelly, whose practice specialises in trust and elder law.
“The department is taking a much tougher line. It is looking at things really quite hard, and it’s getting more and more difficult to qualify for rest home subsidies if you’ve set up a trust and gifted assets into that trust. It’s effectively altered the rules. I think it’s going to be very hard to avoid the rest home regime, to qualify for a subsidy, if you’ve got significant assets available to you,” he says.
TESTING THE LINE
The first serious challenge to the ministry’s hard line has been before the Wellington High Court this month, after a woman was refused a rest home subsidy because the ministry judged there had been almost $500,000 in excess gifting to a trust controlled by her and her husband. “If the outcome of the case remains as the MSD seeks, then there’s potential for a lot of people in New Zealand to be affected,” says counsel Jonathan Scragg, of Duncan Cotterill.
The ministry is zeroing in on four main areas that affect eligibility for a subsidy for residential aged care. The subsidy varies by region but averages $770 a week for rest home care, $980 for dementia care and $1260 for hospital-level residential care. To qualify for the subsidy, total assets must be less than $213,297 for a single person or a couple both in care. For a couple in which only one partner is in care, assets must be either $213,297 in total, or $116,806 excluding the family home and car. If assets are above that level, the subsidy does not kick in until excess assets are exhausted. A wide swathe of middle- and upper-income New Zealanders have sequestered assets into trusts by gifting to evade the asset-testing regime.
The first major change has been in how much a couple are allowed to gift each year. For decades accountants and lawyers have been advising clients they will be safe from asset testing if they make an annual gift to a trust of $54,000 for a couple, or $27,000 each, which was the maximum amount allowable without attracting gift duty. In the five years before going into care, only $6000 gifting a year is allowed.
Now, however, the ministry is no longer recognising the $54,000 a year gifting programmes of couples that were standard under the old gift duty. Instead it says gifting of $27,000 a year “per application” is allowed, meaning that if one person goes into care, $27,000 a year is allowed altogether for the couple. The ministry has done little to explain this contentious matter to the public, with the latest version of the asset testing information brochure, published on July 1, the first to explicitly state that “for couples, gifting is $27,000 in total – not per person”. That piece of information was in a footnote.
So if a couple have gifted $540,000 to a trust over 10 years, they will only have $270,000 in gifting recognised, with the rest regarded as excess gifting. (The exception is if both partners are in care at the same time, in which case the gifting allowance is $54,000 a year.)
CHANGE? WHAT CHANGE?
The ministry is adamant there has been no policy change. It says the policy is a result of new legislation in 2005, and was publicised to lawyers and accountants in 2006, and again after the abolition of gift duty. However, experts in the field say although the ministry may have had the legislative power for the policy, in practice it has not always implemented these rules. John Rowe, a chartered accountant whose firm, Gilligan Rowe and Associates, specialises in family trusts, says to say there has been no change is “rubbish”. “I have seen numerous examples in the recent past where it has not enforced $27,000; it has allowed $54,000 for a couple.” Kelly also says there has been a change in practice by the ministry.
The refusal to allow a $54,000 annual gifting allowance is at the centre of the Wellington court challenge. The couple in the case had a trust holding $2.6 million in assets, transferred by gifting between 1987 and 1996. They applied for a means assessment in 2009 after the wife entered rest home care. The ministry applied the formula of $27,000 in allowable annual gifting by a couple, determining that an excess of $500,000 in assets had been transferred to the trust and could therefore be considered as part of the means assessment. Scragg said the ministry’s interpretation would “create concern and uncertainty” for couples who had gifting programmes under the old gift duty rules of the Estate and Gift Duties Act 1968. “Anyone who at any time had been part of the old gifting regime will potentially be affected by this decision.
“If the MSD’s interpretation is correct, couples who have undertaken gifting programmes where each spouse or partner gifts $27,000 per annum into a family trust, or $54,000 a year as a couple, may be considered to have deprived themselves, and accordingly may be ineligible for the residential care subsidy.”
The second big change is that the ministry is prepared to go back further into family trust history to uncover excess gifting. Again, the ministry maintains there has been no change in policy. And again, although there is no limit in law how far back it can go, lawyers and accountants say until recently the practice has been to look at gifting only in the five years before going into care. Now accountants are reporting increasing interest by the ministry in longer time periods when it does asset and income assessments. In the case before the Wellington courts, the ministry looked at gifting going back to 1987.
Says Kelly: “When a lot of assets were put into trust in the 1980s and 1990s, the policy was not to go back more than five years. If you got your gifting done and out of the way quickly, the ministry normally would not go back beyond the five-year period. That’s all changed; it’s taking a very different approach.
“One of the criticisms is that the rules have changed and that is seen as unfair. The trusts were set up on one basis, and now they’re being judged on a different basis,” says Kelly.
INCOME TARGETED TOO
In a third change, the ministry is looking harder not just at assets, but whether people going into rest homes have deprived themselves of potential income, again making use of its existing powers. Kelly gives the example of a rental property, saying that if it has been put into a trust, the ministry can take account of income that might have been received if ownership of the property had been retained. On this point, the ministry concedes practice has changed. “Over time, practices evolved and strengthened. This included considering income from trusts,” says Warren Hudson, the ministry’s general manager of senior services.
Jonathan Cron, director of New Zealand Trustee Services, says the ministry attitude to assets in family trusts has become “a moving target”. He predicts further tightening as trusts’ paperwork is looked at more closely. “What we’re seeing is these Government agencies will gear themselves up to look at the trusts, how a trust has been administered from a compliance standpoint; that is, is the trust a sham or an alter ego, were there decisions, how have they been recorded?” Elsewhere, Inland Revenue is targeting trusts used to divert income and thus claim Working for Families payments. The Law Commission has just released a paper proposing an overhaul of the Law of Trusts, including a new Trusts Act and enhanced accountability for trustees.
CARE COSTS RISING
Driving the tightening of rest home care subsidies, no doubt, is the ballooning bill for looking after an ageing population. Ministry of Health payments to district health boards (DHBs) for aged residential care have jumped by a quarter in the past five years, to $900 million in 2012, and are on track to exceed $1 billion in 2014. The proportion of agedcare residents receiving the full subsidy is growing after Labour relaxed asset testing in 2005, increasing the value of allowable assets from $15,000 to $150,000. Labour planned to keep raising the threshold by $10,000 a year. In this year’s Budget, the Government saved money by chopping that back, restricting increases to the rate of inflation.
Much of the sequestration of assets in trusts has been driven by a fear that a family’s fortune may be rapidly devoured by rest home costs for an ageing parent. But some of those fears may be exaggerated. Rest home stays are actually getting shorter, says New Zealand Aged Care Association chief executive Martin Taylor, because DHBs are funding services for people to stay longer in their own homes. The average stay in rest homes is now just one year. For someone who fails the asset test, that will cost an average of $830 a week, or $43,000 for the year. Where costs can mount is in dementia care, where residents have stays of up to 10 years. However, those who fail the asset test do not have to pay the full cost of care, having their contributions capped at the level of the rest home subsidy. For a 10-year period, that would amount to $430,000.
Taylor opposes this concession to the well-off by not charging them the full cost of care. “Why are we giving them a subsidy? It’s just nuts. Changing that one thing would release $50-80 million,” he says. But Auckland chartered accountant John Rowe says rest home costs can have a major impact on family wealth. “This is one of the biggest ways families have their assets divested from them, surviving spouses have the means of their support divested from them and the ability for inter-generational asset protection and asset growth is taken away as well.”
CAPITAL GAINS IMMUNE
So, is there any point in transferring assets to a trust in one lump sum, given it will be seen by the ministry as excessive gifting? Surprisingly, says Rowe, there is one benefit. With the removal of gift duty, if a couple gift their $500,000 house into a trust in one lump and then one of them applies for a residential care subsidy, they will be ineligible for a subsidy, because they will be considered to have deprived themselves of assets. If the transfer was within five years of applying for a subsidy, $6000 of gifting would be allowed, leaving $494,000 in assets. If the transfer was more than five years before going into a rest home, $486,500 would be left in assets. In both cases that would mean the assets would have to be used to offset the cost of residential care. However, trust beneficiaries would be able to retain capital gains, as they are not counted by the ministry. Yet.
If the ministry is getting harder nosed about using its powers to siphon money from trusts, others are striving harder to keep their loot out of reach. Rowe says he has seen two cases of couples resorting to matrimonial property divisions before one person goes into care. If the wife, for example, is going into residential care, the couple make a division of property under Section 21 of the Property Relationships Act, which allows them to contract out of equal ownership of assets and instead divide up their property as they wish. The wife might be allocated the family home, which the ministry would then put a caveat over to offset residential care costs, and the husband might be allocated financial assets that the ministry couldn’t touch. He would be allowed to stay in the family home.
The battle of wits over asset testing and asset test dodging will only intensify as the population ages. For the well-off and their families, the impulse to make the state pick up the bill so the heirs can collect their inheritance is deeply entrenched. For now, though, the Government is making decisive inroads into those jealously guarded assets, moves that have been all the more effective for their stealth.