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Gifts, trusts and subsidies
Many people are confused about whether it is now appropriate to gift substantial assets to Trusts or to family members following the abolition of gift duty from 1 October 2011.
The answer to that question requires an assessment of current and future risks including the likelihood that you may need to rely upon a Residential Care Subsidy in the future.
In the past, gifting was usually carried out at the rate of $27,000 per annum for each person making gifts. The limit was set by reference to tax laws which taxed gifts over that level. In 2011, the taxation of gifts was repealed with the result that gifts of any size can now be made without incurring a taxation liability by reason of making the gift. In some instances, the recipient of a gift can still be taxed as if the gift was income received. That has not changed. The other key issue which has not changed is the Government’s Policy in respect of Residential Care Subsidies.
If a person requires a Residential Care Subsidy, the person is subjected to an asset and income testing. As part of the asset testing, an applicant is allowed to have gifted $6,000 per application in the 5-years prior to applying for the Subsidy. Any gifts over that $6,000 limit are included as capital for the purposes of the test. In other words, they are counted back as if you still had the asset. The test allows a degree of averaging over that 5 year period.
For the period outside the last 5 years, there is an allowance of $27,000 per annum per application. There is no averaging applicable in respect of those years. Therefore, if a single gift of $200,000 was made in one year, there will be an excess of $173,000 in that year which is counted back as capital for the purposes of the asset test. The fact that no gifts were made in the subsequent years is not relevant.
It is also important to understand that Residential Care Subsidies and allowances are set “per application”. Each application relates to an applicant for care and also includes the spouse of that applicant. Therefore, the application relates in many cases to the assets and income of a couple. Where that occurs, and the couple have each gifted $27,000 per annum over time, one half of those gifts can be counted back as assets of the couple for the purposes of the test as the allowance is $27,000 per annum per application, not per person.
If both of the couple require care, there will be two applications and they will each be allowed an allowance of $27,000. If the applicant’s spouse has died, then the gifting of the deceased spouse is not relevant as that person is not included in the application.
Therefore, even when gifting is carried out at the previously safe level for tax purposes of $27,000 per annum per person, there can still be a negative outcome for Residential Care Subsidy purposes, if one of a couple requires care and the couple have both undertaken gifting.
Weighed against the issue of future subsidy availability are the potential reasons for gifting now, which can include real business risk and/or the need to distribute assets for personal or family reasons.
Some industries are inherently more risky than others and in some cases, the lack of practical insurance options may require the use of a Trust and significant gifting in order to protect against future business risk.
Gifts made during a lifetime are also a useful means of distributing wealth among family in a manner than cannot be challenged like a Will.
It also needs to be noted that the current rules in respect of Residential Care Subsidy allowances arise from Government policy. That policy can change at any time, so you cannot guarantee you will qualify for a subsidy, or if that subsidy will exist in the future.
Whilst some gifting at the level of $27,000 per annum has been allowed for the purposes of Residential Care Subsidies at present, those allowances may not necessarily continue in the future.
So what are people doing?
People who are simply making gifts of substantial amounts to clear out their gifting balances and to allocate assets into the hands of the entities or persons whom they wish to hold those assets. In some cases can simplify estate planning, or trust asset plans. These people are usually in a position where they do not expect to ever qualify for a Residential Care Subsidy or where their potential “current” risks are considered greater than the future potential risk of being unable to meet residential care costs.
Some people are gifting at $27,000 per annum are simply continuing to do so.
Some people have reduced their gifting so that they are gifting only $27,000 per annum as a couple. This ensures compliance with current residential care asset testing policy where that is the greatest concern.
Another factor of importance with Residential Care Subsidies is the asset limit thresholds which apply for a couple. From 1 July 2012, the asset limit for a single person or a couple where they are both in care is $213,297.00. For a couple where only one requires care, there is a choice between an asset threshold of $213,297.00, or a threshold of $116,806.00 where the family home, car and a pre-paid funeral (of up to $10,000) are exempt assets.
In the past, many couples put their houses into Trusts to protect the house as a family asset against the risk of residential care costs. The new thresholds may mean that in some instances, it may be advisable to wind up the Trust and elect the second threshold with a smaller cash sum but with the family home exempt. What is important is that the individual’s position is reconsidered as Government policy continues to evolve and that structures are not simply retained because they were advantageous under previous policy.
Decisions about gifting and about continuing Trust structures should not be made lightly. It is important that the risks are properly assessed and that you are comfortable with and fully understand the decisions being made.
Article is supplied by East Brewster Ltd in Rotorua – Commercial and Property Law Specialists