Money: Trusts not simple way to gaining help from state

By DENHAM MARTIN

We are a married couple in our late 60s, and have recently experienced some ill-health which has caused us to seriously consider that one or both of us may need rest-home care.

Many of our friends have suggested that our home should be owned by a trust, so that we will qualify for a rest-home subsidy. We are not sure how this works, and would like to know if having a trust will assist us to obtain financial assistance towards the rest-home fees.

K.W., Whangaparoa In recent years, trusts have been more frequently used as a means of assisting people to seek and obtain financial assistance from the state in the areas of health and education.

Where individuals can remove assets from their ownership, they may then be entitled to a benefit they may not have qualified for had they retained ownership of those assets.

However, I suspect this practice is frequently misunderstood by the elderly, who are often "sold" trusts for rest-home subsidy purposes.

If you settle a trust, you will then need to sell your home to the trust at market value. You will receive from the trustees an acknowledgement of debt for the market value of your home. You can forgive the trust the debt at the rate of $27,000 a person each year, without incurring the liability to pay any gift duty. For example, if your house is worth $270,000, then it will take five years to fully forgive the outstanding debt to the trust, assuming you both gift to the full level each year.

If you needed to go into a rest-home before completing your gifting to the trust, you would not qualify for a subsidy because the debt owed to you by the trust is an asset of yours.

To qualify for a rest-home subsidy, you need to have reduced your assets to: $30,000 if you are a married couple and both in long-term residential care; $45,000 if you are a couple and only one of you is in care; and $15,000 for a single person.

You also need to have completed your gifting programme five years before applying for a subsidy.

Even if you manage to achieve this, your application may still be declined if Work and Income New Zealand consider that you entered into the trust with the sole purpose of obtaining a rest-home subsidy.

Under the Social Security Act, Winz is given very broad powers to review the affairs of an individual who applies for a subsidy, particularly if the applicant has conducted his or her affairs with a view to improving his or her chances of gaining a subsidy.

Furthermore, while there is still a five-year look-back period in place, it is imposed not by statute but by internal policy, which can be reviewed at any time.

There have been many instances where Winz has gone back many more than five years and refused an application for a subsidy.

Given Winz' wide legislative powers under the act, and the possibility of changes to the five-year look-back rule, I would not advise you to enter into a trust with the sole purpose of seeking to qualify for a rest-home subsidy: it is fraught with uncertainty, and may not serve you well.

But there are many ways a trust might serve your other needs, particularly passing your wealth on to the next generations of your family and for creditor protection.

Trusts can also give some protection from future matrimonial property claims, although you may not consider this to be an issue in your case.

* Denham Martin is the principal of Denham Martin & Associates, lawyers specialising in advice on taxation and related matters.