Can we still trust Trusts?
The concept of a Trust came into being through English Law some centuries ago when the taxation burden imposed by the Crown, at the time, became too heavy for landowning gentry (in their view) to meet. The concept of Trust’s emerged as a way to divest ownership (largely the target of the taxation burden) but retain the benefit and use of the land concerned.
The resulting concept of Settlors (those that transfer an asset or assets to Trustees), Trustees (those that hold the asset or assets transferred) and Beneficiaries (those that benefit from the assets held by Trustees at the behest of Settlors) was born. This is the cornerstone of Trust law and remains so to this day.
The above noted, the efficiency of Trusts in the modern area, to protect assets held and to provide other benefits to those that employ Trusts as part of their financial arrangements, has come under increasing scrutiny in recent years. Two areas of Law where Trusts have been challenged are associated with:-
Government asset testing when it comes to the eligibility for subsidised long-term care for the elderly, and
Relationship Property.
The inroads into the efficiency of Trusts with regard to protecting assets associated with Relationship Property matters will be the subject of another insight on Young Hunter’s website.
This insight is dedicated to Trust efficiency when it comes to the obtaining of subsidised care and how Trusts continue to respond and provide protection notwithstanding Government asset testing. For many there is a belief that Government asset testing “overrides” existing Trust structures (and that such is the case for Trusts that have been in place for many years) however that is a common misunderstanding.
Even with the tightening of eligibility for subsidised long-term care, and notwithstanding the misperception many people have, the position is in summary as follows:-
Where an asset, such as a family home, has been transferred to a Trust then the Trust becomes the legal owner of the asset transferred.
Provided the value of the property at the time of the transfer has been acknowledged as a debt owed to the individual or individuals who owned the property prior to its transfer to a Trust and where those same individuals have progressively gifted the value of such debt over time (gifting a maximum of $27,000 per annum), the original debt also becomes Trust property.
The only condition associated with what is described in paragraph 2 above, which has an impact on the ability to seek a subsidy for care, relates to whether any amount has been gifted within a 5-year period prior to the time that subsidised care may be required.
Any capital gain in the value of the property transferred to a Trust, after the transfer has taken place accrues to the Trust. Such capital gain does not need to be gifted (in the manner described above) and is not taken into account as far as Government asset testing is concerned. Additionally, there is no need to gift capital gain (increase in value of the property) over time. The only debt that needs be forgiven is the original debt equal to the value of the property at the time of its transfer to the Trust.
In addition to having Trust structures own assets, many people own assets alongside such structures but in their personal names. Those assets and the value thereof are tested under the Government asset testing regime (relating to eligibility for a subsidy for long term care).
The maximum that an individual or a couple can own, as personally held assets and still be eligible for care, is circa $250,000.00. Trust owned assets are not counted as part of the circa $250,000.00 amount and further not counted as an asset in the hands of the applicant for subsidised care.
By way of example, Kelly and Don transferred their property to a Trust in the year 2000. At the time, the property was valued at $300,000.00 and was transferred to the Trust for that figure. The Trust acknowledged a debt in favour of Kelly and Don in the amount of $300,000.00 and a progressive gifting program has been completed by Kelly and Don.
With $27,000.00 per annum the maximum amount that can be gifted by Kelly and Don, the gifting was completed within 12 years of the date of the original transfer which means that the property has been owned by the Trust, without any debt owed to Kelly and Don, since 2012. This also means that if Kelly and Don had applied for subsidised long-term care prior to 2017 (i.e. within 5 years of the date of the last gift that they made), any amount gifted in that 5-year period would have been treated as their personally held assets and reduced their ability to obtain subsidised care in that those funds would have to be used first to pay for their care before they were eligible for a full subsidy.
The property is now worth $850,000.00 which means that not only is the original $300,000.00 sum owned by the Trust, but the capital gain since then of $550,000.00.
Kelly and Don set up their Trust because Don is a self-employed contractor and there was some risk that he might be sued because of the nature of his business. As noted above, the transfer of an asset to a Trust means that the Trust legally owns the asset and, because of this, the Trust provides protection in regard to Don being sued (because his personally owned assets are reduced). His family home is protected by the Trust against this and further provides long-term protection of family held assets for Kelly and Don’s children, Zara, Terry and Mitchell.
Kelly and Don are thinking about their subsidised long-term care needs because they are now 56 and 58 years old respectively. Provided Kelly and Don’s personally held assets have a value of less than $250,000.00 then the Trust arrangement that they put in place some 23 years ago will provide them with the ability to retain that asset without having to sell it, mortgage it or otherwise part with it to pay for their long-term care needs. As can be seen, the Trust structure has served them very well and will continue to do so.
See other insights that follow regarding Kelly and Don, their children and extended family as an ongoing case study of matters that the majority of kiwi’s, and their families, just like you encounter.
For more information regarding the purposes of Trusts, or if you are wanting to get a Trust structure put in place, please do not hesitate to contact us.
