Mary Holm on investing

Mary Holm is a personal finance writer

Mary Holm: Leveraging assets goes back a way

2 comments
Using the right methods can save you the heavy lifting. Murray Family Photo / Kauri Museum, Matakohe
Using the right methods can save you the heavy lifting. Murray Family Photo / Kauri Museum, Matakohe

With reference to the comment in your last column, the situation depicted in the photo the week before was just a little before my time and is a variation of "pit-sawing". However, in the foreground you will see a "timberjack", and in the background a timber ramp up on to the raised area where the log is resting.

A very common method in the early 1900s for raising large logs or even moving them was to use the timberjack and ramps. Needless to say, it was dangerous work, as slipping of the tang happened with disastrous results.

I have used a timberjack and they are surprisingly efficient. However, you do need quick reflexes.

There's an expert out there on everything!

Leveraging II

The photo two weeks ago did in fact depict an alternative form of pit-sawing by a method often used in uneven or rocky terrain.

The logs are most likely moved into this structure using timberjacks manufactured by AG Price of Thames and likely designed by a Mr Macleod, the sawmill foreman at Henderson and MacFarlane's Kauri Sawmill in Henderson.

The photo shows these tools in use. Should your correspondent seek more information re these processes, it can be found in the excellent book Kauri to Radiata by Thomas E. Simpson.

Make that two experts.

What's all this got to do with personal finance? Let's just say it's about gearing - or leveraging, as the Americans call it.

Rest home subsidies

I read with interest your reply to a query about trusts a while ago.

Last week my wife and I updated our wills and I specifically asked my very senior lawyer about the use of a trust for rest home subsidies. His reply: "Forget it. They are no use any longer for this purpose and are getting broken every day."

So, who is right, my lawyer or your anecdote about a friend's mother - who was told by a rest home manager that just about everyone else in the home had a trust and therefore qualified for a subsidy?

It seems that the other rest home residents may have either had trusts for many years or come into the rest home under older rules.

But first, let's look at the current rules on "residential care subsidies".

According to the Ministry of Social Development, you can get a subsidy in these circumstances:

* If you have a partner who is not in care, you must have assets - excluding personal effects - of less than $115,000 excluding your home and car, or $210,000 including your home and car. Given that few houses are worth less than $210,000, I imagine the second threshold wouldn't apply often. In other words, you are expected to spend your own money on rest home care until you have less than the $115,000 or $210,000 threshold. Then you may get the subsidy.

* If you haven't got a partner or your partner is also in residential care, you must have assets of less than $210,000, including your home. So you are expected to spend your own money on rest home care until you have less than $210,000. In many cases, that means that to qualify for the subsidy, you would have to sell your home.

In both situations, some debts - such as bank loans - are subtracted from your assets to get the totals. Both the $115,000 and $210,000 thresholds automatically rise by $10,000 each July.

An alternative to selling your home might be an interest-free Residential Care Loan from the government to help pay for your care. These loans are available when "your assets are above the threshold because you own your own home, and you have limited cash or other assets", says the ministry.

To get a loan, generally you need to have assets other than your home of less than $15,000 if you are single, or $30,000 if you are a couple both in care. "The loan is repayable when you sell your home, or 12 months after your death, whichever is the earliest."

How do trusts come into this? The law prevents you or your partner from qualifying for the subsidy by giving away more than minimal assets - to a person, trust, charity or other entity. This is called "deprivation".

"Gifted assets can be 'counted back' or included in a person's financial means assessment," says the ministry. "This can effectively remove any perceived benefit in disposing of personal assets into a trust."

The legislation allows you to give away up to $6000 a year - including "gifts in recognition of care" - in the five years before you apply for a residential care subsidy (the gifting period).

If your total gifts over the five years exceed $30,000, the excess will be counted back into your assets. In the period before the gifting period, you can gift $27,000 per year.

"The current practice of the ministry is that your spouse or partner can also gift the same amount if they have applied for a subsidy as well," says a ministry spokesperson.

Neither of these gifting provisions will change from October 1, 2011 with the proposed changes to the IRD gifting rules.

Adds the ministry: "It is also important to note that if a person with a trust does qualify for a residential care subsidy, they may still be required to contribute any income that they may be entitled to receive from that trust towards the cost of their care."

For more information, go to www.workandincome.govt.nz and do a search on "rest home subsidy" or ring 0800 999 727.

Where does this leave our correspondent? Unless you are many years away from being likely to use rest home care, your lawyer seems to be right - especially taking into account the costs and hassle of establishing and maintaining a trust.

Adds trust expert John Bassett of Bell Gully: "Use of a trust just to achieve the rest home subsidy is unlikely to be worthwhile. The rules have in place safeguards designed to prevent that outcome in many cases."

Use of trusts

I wish to comment on the use of trusts to gain rest home subsidies based on the assets the individuals own.

Many people have avoided paying for their rest home fees by placing their assets in trust. This is now a very serious situation for the Government, as it now pays full fees for so many people.

The best solution I can see is that people who have placed their assets in trust should pay full rest home fees, while those who have not should be fully subsidised. The rich would pay for their care and the poor would not - which is exactly what the original legislation intended.

What do you think about that idea?

As stated above, it no longer makes sense to try to use a trust to gain rest home subsidies. But people who have set up trusts in the past may still benefit from them in this way.

Not being an expert on trusts, I asked John Bassett what he thinks of your idea.

"I do not agree with the view that the availability of the subsidy should be tested simply on the basis of whether assets have been placed in a trust," says Bassett. "There are a number of genuine reasons unrelated to rest home subsidy why people find trust ownership of family assets to be useful. It would be punitive to withhold the subsidy simply because other genuine reasons have been followed.

"I think that the better approach is the current one of putting in place a suitable asset threshold test supported by rules designed to reveal the true asset position.

"I also do not think that it is right to suggest that it is just the wealthy who deploy trusts hoping to get the rest home subsidy. I find that many people have worked hard all their lives, paid all taxes due and achieved varying degrees of financial success. As they approach their senior years, an important objective becomes to leave something to their children. The prospect of rest home costs preventing that outcome becomes a source of frustration.

"Whether it is right to use a trust to preserve legacies for the next generation may not produce a straightforward answer that everyone can agree on.

"Nonetheless I expect that most people would at least understand

the seniors' desire to strive to help their children."

My comment: The difficulty with this, of course, is that people who haven't set up a trust may end up not being able to leave much at all to their children.

So, are trusts unfair?

A few years ago, this column went into family trusts in some depth. I started out sceptical but ended up appreciating the need for trusts in some situations. One example: parents who had set up a trust to take care of a child with a disability after they die.

Getting back to rest home expenses, the cleanest way to handle the problem would be for the Government to pay everybody's full costs.

But then everyone would want to be in the poshest rest homes. And in any case, the Government is hardly flush with spare cash. This is not easy!

Job theory

We will have to talk very quietly, as my wife has banned me from reading your column.

Two weeks ago you came up with a theory about people working into their old age beyond 65, and how this would help the young get jobs. What absolute rubbish and, thank goodness, the very wealthy Prime Minister thinks it [is] rubbish as well.

Last week you had a letter from some poor deranged soul saying that they felt guilty about taking the NZ Superannuation pittance, when they had a part-time job that paid a pittance. I hope this was a joke letter, because I do hope that such a person does not exist.

Okay - just whispering. That letter was no joke. How about yours?

Happy KiwiSaver

When KiwiSaver came along, I just couldn't believe my luck. My wife and I were both aged 62 and we both joined up on the first day. Since then we have happily contributed $1040 each every year.

Next year our five years are up and we can withdraw the lot. Our contributions will amount to $5200 each.

Add to that the Government's $5200 and the $1000 kick-start and our funds will total $11,400 each.

In spite of the dismal returns from our fund manager - not entirely their fault (GFC and all) - and yes, I chose a growth fund, we are likely to end up with about $13,000 each.

More than enough to spend a month backpacking in the Greek Islands. Now how good is that!

You'll get slightly less now the tax credit has been halved this year. But still, you and other 60-pluses do really well in KiwiSaver.

Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and best-selling author on personal finance. Her website is www.maryholm.com. Her advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland.

Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.

- NZ Herald

Have your say

We aim to have healthy debate. But we won't publish comments that abuse others. View commenting guidelines.

1200 characters left

Sort by
  • Oldest

© Copyright 2014, APN New Zealand Limited

Assembled by: (static) on production apcf02 at 27 Dec 2014 16:08:54 Processing Time: 435ms