RESIDENTIAL CARE SUBSIDY AND GIFTING

Residential care subsidy and gifting: What are the “new rules” around gifting and qualifying for a hardship subsidy?

30-Second Read

Thinking about gifting assets to a trust to reduce your future residential care costs? Be careful. Recent court decisions changed how the Ministry of Social Development assesses gifting when determining eligibility for the Residential Care Subsidy. Many families who followed long-standing advice to gradually gift assets to a trust may find those gifts are now treated as excess gifting, potentially affecting subsidy eligibility. If you have a trust, have undertaken a gifting programme, or expect to apply for a Residential Care Subsidy in the future, it is important to understand how the rules apply to your situation before making any further decisions.

Your lawyer has possibly mis-advised you; although in good faith. Why do we say that? Well, here’s a quick checklist before you start panicking:

Quick checklist

1. Do you have a trust?
2. Have you done any gifting?
3. Are you worried about getting residential care subsidies in future?
   • If not, you can stop reading here
   • If you are, keep reading
   • If you are not sure what I mean, see below for an explanation
4. Have you (and your partner if applicable) gifted $27,000 per year or $54,000 per year?

The Gist of It

Previously, the country’s lawyers had advised people to gift no more than $54,000 per couple per year so that they wouldn’t be accused of excessive gifting when it came time to be assessed for a residential care subsidy. If your assets come under certain figures the Govt. will subsidise your rest-home care. People generally gradually and cautiously gift their house to their trust so that anything they do doesn’t stray into excess.

BUT! A recent series of court decisions, upheld all the way to the Court of Appeal, has now said:

Gifts of more than $27,000 per year, per application made before the five year gifting period, may be added into the assessment. For couples, gifting is $27,000 in total – not per person.

See this page(opens in new tab) on the WINZ website for more info.

What does this mean for you?
Here’s what the Law Society of NZ said(opens in new tab):*

The result of the High Court’s decision is that many people who have undertaken a gifting programme to a family trust may now unexpectedly find themselves ineligible for the residential care subsidy. This will come as an unwelcome shock to many. It will also likely cause many members of the profession concern at the prospect of claims from disgruntled clients for previous advice on gifting programmes.

The long and the short of it is that if you have already gifted more than $27,000 per annum to your trust, then this may now be viewed by MSD(opens in new tab) as excessive gifting. (NB: If you have mirror trusts then you may be able to get away with $27,000 per trust per year). If you acted on legal advice, then I suggest you approach your lawyer about making a claim against them. The NZ Law Society makes this comment to lawyers:

Lawyers may wish to consider whether there is a need to notify professional indemnity insurers in respect of the risk of potential claims for previous gifting advice. Some brokers are encouraging practitioners to notify insurers of the risk of potential claims. Practitioners are encouraged to check their particular circumstances with their broker/insurer.

Here’s the judgement of the Court of Appeal:

Gary Bridgford as Executor v CCDHB [2013] NZCA 410(opens in new tab)

Note that lawyers throughout NZ advised people based on the then-understanding of $54,000 per couple per year, and so acted in good faith. But, at the end of the day, the advice has been misleading, as this recent judgement has shown. It’s not pleasant for anyone.

Yes, But?!

Yes, but didn’t the IRD change the law or something? What you might be referring to was the repeal of gift duty(opens in new tab). What happened was that the Government passed a law change, meaning that you could gift your entire house to your trust, without incurring gift duty. Previously there was a limit of $54,000 per couple per year. Anything above that had gift duty applied to it. BUT (and here’s the key point), the MSD’s view of excessive gifting didn’t change. If anything, it has tightened up, as explained above.

Further Reading

See these articles for more info:

• Gifting and entitlement to residential care subsidies(opens in new tab) (Harkness Henry Lawyers)
• Residential Care Subsidy(opens in new tab) (Work and Income)
• Family Trust Accounting – What Do I Need to Do?

Need Help?

Concerned about how gifting, trusts, or asset ownership could affect your future Residential Care Subsidy entitlement? The rules are complex, the consequences can be significant, and advice that was commonly given in the past may no longer achieve the result you expected. Contact EpsomTax today to review your trust structure, gifting history, and overall asset position so you can make informed decisions before any issues arise.

* Note that the quoted blog post from the NZ Law Society is dated Jun 21, 2013, which was before the Appeal Court had made its ruling. This Court ruling has now confirmed MSD’s view, as stated above.

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See our three-video series:

• Sham Trusts: Could Your Family Trust Be a Sham?
• Common Rental Ownership Structures
• Which Ownership Structure Should I Use for My Rental Property?

And the following blog articles:

• Family Trusts: Basic Concepts
• Family Trust Accounting – What Do I Need to Do?
• Common Misconceptions About Family Trusts