Don’t say I didn’t warn you
We advisors, who specialise in trusts, had felt for some time the days of assets being cleanly ring-fenced and largely taken out of the equation for rest home subsidy assessments were closing.
Amid the ticker tape and delighted adios to gifting in 2011, I did portend potential fishhooks, including around residential care subsidies. And, a year later, what do you know? Cue: the Ministry of Social Development, the High Court … and a pretty sizeable snag. The long-standing formula on which decades of gifting had been based was left dangling.
That the protective sheath was ripped open didn’t come as a total bolt out of the blue. How, and the speed with which it happened, was what caught everyone a tad by surprise.
And, wouldn’t you know it, the analytical post mortem was still in full flight when it was announced the High Court’s ruling would be appealed. Roll on the Court of Appeal, which delivered its decision late last year: a very cut and dried judgment that the lower court’s rulings stood.
Janice’s Lesson Number 1: Upshot? Anyone who was banking on their trust to pave the way for the state picking up the tab for their rest home care is likely in for a rude shock – and a bit of a financial rethink.
Right, so let’s back up the truck a smidge and look at what led to all this legal oscillation.
Life as we knew it
As it stood in the past, if a couple had dotted all their i’s, crossed all their t’s and transferred assets to a family trust in line with certain thresholds and timelines, they could be more or less assured their worldly goods wouldn’t impact on their eligibility for a residential care subsidy.
Janice’s Lesson Number 2: The historical accepted deal basically went like this for a married or de facto couple: each could transfer $27,000 per year – or $54,000 as a couple – to a family trust and it was deemed “safe”. There was an exception when it came to asset testing: all but $6000 of each $27,000 gifted during the preceding five years remained fair game under a claw back provision.
Fast forward to that High Court ruling on the case of B v Chief Executive of the Ministry of Social Development, and, poof, that little formula was turned well and truly on its ear. It effectively halved the couple’s threshold of $54,000, and applied that to gifting, not just in the past five years, but, in this particular situation, way, way back to the 1980s.
In their case, Mr and Mrs B established a trust in 1987, of which they and their close family were beneficiaries. To cut a long story short, the trust bought property, after Mr and Mrs B provided a loan, which was forgiven by way of a joint $54,000 annual gifting programme that ended in 2004. By 2009, Mrs B – who’s, sadly, since passed away – needed rest home care, and went through the Ministry’s assessment regime, presumably comfy in the knowledge that her assets at hand were under the $180,000 threshold (which, by the way, has since been bumped up to $215,132 for a single person or where a couple are both in care. A lower threshold of $117, 811 can apply where a family home, care and pre-paid funeral are exempt assets).
It’s all in the interpretation
Not so, said the Ministry. By its calculations, of the $918,000 gifted, it accepted only $459,000 (half), leaving the remaining (Mr B’s gifting) as assets of Mrs B, hence giving her means well and truly above the allowable $180,000. Ergo, bye-bye rest home subsidy. But, hold on, you say – the B’s had gifted the appropriate $54,000 per annum as a couple, right, and that’s what they were supposed to do, right?
Janice’s Lesson Number 3: Yes and yes … and, yep, sometimes the law throws a curve ball. The Ministry essentially decided to test its own policy, and, in assessing Mrs B’s worth, deemed that her husband’s share of the gifting during the years could also be taken into account and classed as hers, which, in effect, meant that the hitherto accepted couples’ gifting threshold was slashed in half.
What’s also significant, and kind of interesting, is the way the Ministry brought about the change. The previous testing regime had been accepted practice for years. While the Ministry now maintains it had previously flagged a rethink, it chose not to go down the route of formally promoting the change, complete with usual advance warning, preferring to “suck it and see” by rejecting Mrs B’s application.
Quick fix
I suspect the Ministry was looking for the quickest fix possible, driven by the country’s soaring $1b annual residential care bill. And the Court of Appeal has backed it in what is now a judge-made law, which, of course, circumvents the often lengthy hoopla involved with politically-driven law change.
Every trust is as unique as the people for whom it was established. Depending on the nature and objectives of your trust, the impact of these developments could range from zilch right through to momentous. I can, however, see potential conundrums aplenty for some.
Janice’s Lesson Number 4: Flick your legal advisor a quick email or pick up the phone – there may very well be strategies that can be put in place now to better protect your interests for the future. The sooner you start doing the homework, the better primed you’ll be to restructure your affairs to your best advantage. As it stands, if you have a trust, assume you’ll be up for residential care costs – think around $700 a week for reasonably standard care to over $1000 for the likes of dementia – until you receive very sound legal advice to the contrary.
Disclaimer: This information is correct at time of publication, designed as a general guide and should not replace specific legal advice on a particular issue.