Rest Home Subsidies and Family Trusts - The vexing issue of Family Trusts and hospital and rest home subsidies in NZ

17th March 2021

Prior to 1991, New Zealanders had been able to rest assured that from cradle to grave they would never foot a hospital or rest home bill. This all changed when the Residential Care Subsidy regime was introduced in 1991 under the Social Security Act 1964. Under this regime, which still operates today, New Zealanders needing permanent hospitalisation or rest home care have to fund a percentage of the cost themselves if they have assets above the financial threshold prescribed in the Act (the threshold). Those whose assets fall below the threshold continue to get their hospitalisation or rest home care for free. 


Family Trusts – the way around the threshold…

There is an adage that lawyers can’t break the law, but they can always find a way around it. And so just like putting tomato sauce on your fish and chips, following the introduction of the Residential Care Subsidy it soon became the norm for a middle-class New Zealander to have their lawyer form a discretionary family trust, and to “sell” their assets to that Trust. The sale price then became a loan owing by the family trust to the person establishing the trust – let’s call that person Bill - and that loan was gifted away (forgiven) by Bill at $27,000 per annum (being the maximum amount that could be gifted in any 12-month period without paying the (now abolished) gift tax).


That way, when Work and Income New Zealand (WINZ) came to assess whether Bill met the threshold, the assets in the Trust were deemed to be the property of the Trust, rather than Bill’s personal property, with the pleasing result that Bill was eligible for free permanent hospitalisation or rest home care.


Thousands of trusts were established in New Zealand as a way around thousands of people like Bill having to pay their own rest home fees. Added benefits included avoiding the tax surcharge introduced by the 1999 Labour Government - further incentive to hide all one’s money away in a Trust. And of course, having the money in Trust also meant more discretionary spending for Bill, as the beneficiary of his own trust, and more for the kids when Bill died.


Enter, the Baby Boomers

Changes were afoot in 2005 with the election of a Labour/New Zealand First government and the Social Security (Long-term Residential Care) Regulations 2005. By now it was not only plain that family trusts were a highly effective way around thousands of superannuitants paying for their own care, but it was also clear that Baby Boomer Bill and his mates were rapidly growing in number such that the cost of their care would eventually bankrupt the country. And so came the introduction of a new two-fold threshold test, whereby husbands and wives or couples could either elect:


  1. To have their house and modest savings (approximately $80,000 a year) exempted from the threshold


2. To have a single threshold of approximately $180,000, all assets counted.


Rather than curbing rest home subsidy payments and reducing family trust work for lawyers, the poorly drafted legislation under which the new threshold was introduced gave rise to years of litigation before the Court of Appeal eventually clarified in 2013 that WINZ had the right to make their own gifting rules. Those rules now permitted maximum gifting to a family trust of $27,000 per annum per couple ($13,500 per person) or $27,000 for a person who was not married or in a permanent relationship. The threshold was then halved and made far more difficult to meet. For example, if a couple had gifted $200,000 to their trust at the rate of $54,000 per year, WINZ could now rule, retrospectively, that $100,000 of that amount was still owned by the couple for the purposes of the threshold.


For their follow-up act, in 2013 WINZ introduced the income deprivation rule to the stage, whereby if income from a trust, say dividends from shares, that would otherwise be paid to a beneficiary resident in rest home/hospital is then diverted to other members of the family (or accumulated and not paid to the beneficiary in care) then the beneficiary could be deemed to have been deprived of that income, and their rest home subsidy will be reduced by that amount.


Since the threshold has become increasingly difficult to meet, many people with family trusts will no longer qualify. This, along with other recent changes in trust law which have led to increased administrative and therefore financial burdens on trustees, has led to many people deciding to wind up their trusts.


What’s the law in 2021?

Currently, there are several hoops to jump through to determine whether you will qualify for a rest home subsidy.


Age and stage - you may qualify if you:

  • Are aged either 65 or older or are 50-64 with no dependent children.
  • Are assessed as needing long-term residential care in a hospital or rest home.
  • Need this care for an indefinite length of time.
  • Are receiving contracted care services.


Asset Assessment - If these initial criteria are met, WINZ will then look at your assets to assess whether you meet the threshold.


If you are single (and therefore only have your own income) and aged 50-64 category you automatically meet the asset test, and WINZ will only be assessing your income in determining whether you qualify for the subsidy.


Aged 65 or older, you and your partner’s (if you have one) total assets must be $236,336 or less. If your partner isn’t in long-term residential care, you can choose whether the total value of your combined assets is either:


  • $129,423 or less, if you don’t want to include the value of your house and car (your house won’t be counted as an asset if it’s the main place where your partner or dependent child lives);


  • $236,336 for a couple with both partners in care and for a single or widowed person in care (including the value of their home and car).


Family Trust - At this point of the assessment, WINZ will enquire about your family trust and if you have sold, gifted, or transferred any of your personal assets to the trust. As mentioned above, they are looking for income deprivation here. If they determine that you have deprived yourself of an asset or income, then they can add that asset or income back into your financial means assessment.


How far back will WINZ look for assets gifted or sold?

In terms of how far back WINZ will look for assets you have gifted or sold, there are two categories:


  1. Gifted or sold assets in the last 5 years prior to the date of going into rest home care: They won’t count up to $6,500 per year of these assets when you apply for the subsidy. This is a total of $32,500 of any assets you and your partner (even if they’ve died) have gifted or sold over those 5 years. If your partner applies at the same time, the amount will double to $65,000.
  2. Gifted or sold assets longer than 5 years ago: They won’t count up to $27,000 a year of any of these assets between you and your partner (even if they’ve died). If you have completed a one-off gift in any one year over $27,000 then WINZ may allow only $27,000 of that amount gifted, and the means test may count all of that and deem that to be part of your personal assets.


Income Assessment - Once it has been determined if you meet the asset test, WINZ will then assess your income. Your income will include:


  • NZ Superannuation.
  • 50% of private superannuation payments.
  • Overseas government pensions.
  • Earnings from interest, bank accounts, investments, business, or employment; and
  • Income from a family trust, trust, or estate.


What it won’t include is:

  • Any money that your partner has earned through employment.
  • Income from assets when the income is under:
          • $964 a year for a single person.
          • $1,928 a year for a couple when both have been assessed as requiring care.
          • $2,982 a year for a couple when one partner has been assessed as requiring care.
  • A War Disablement pension.


So what’s my subsidy?

At this point, you’ve passed the asset test, and your income has been assessed. The final step to figuring out your subsidy is calculating the difference between the cost of your care and your assessed income contribution. If you have a reasonable income, then you’ll have to chip in. the biggest subsidy – the maximum contribution – is set every year by the District Health Board and pays for the full cost of services which your rest home or hospital provides under contract.

The maximum contribution depends on where you live and is capped at any amount from $875 to $960 per week including GST.


So…. do I still need my Family Trust?

As a result of these changes, if you wish to seek advice regarding the potential ongoing benefits of your trust, and whether to retain it or wind it up, we are here to advise you. McMillan&Co. has a team of lawyers with great expertise in this area. We can assess your particular situation, talk through your options, and advise you on the best way forward.


Charlie Hantler, Senior Solicitor