Is it time to dissolve your family trust?

3 December, 2015 | Alex Dunne

For many family trusts, their only asset is the family home. These Trusts were set up as part of the estate plan that protected the home for future generations of a family.

One of the benefits of such estate planning was to protect the home from the Residential Care Subsidy asset testing regime administered by the Ministry of Social Development (“MSD”).

Under the asset testing regime a person over 65 requiring permanent hospital or rest home care is required to prove to the satisfaction of MSD that their assets are under a certain threshold or they will be ineligible for a residential care subsidy.

In the case of a couple who were married or in a permanent relationship the threshold as of 1 July 2015 was NZ$119,709.00 (excluding their home and car).

If the person applying for the residential care subsidy was not in a permanent relationship then the threshold as of 1 July 2015 was NZ$218,598.00 (including their home and car).

Prior to the decision of the Court of Appeal in the case of Bridgeford v MSD which was decided in 2013, lawyers and accountants advised their clients that if they were a couple that they could each gift $27,000.00 per year in reduction of the debt owed to the trust as a result of the sale to the trust of the family home.

In the Bridgeford v MSD case, The Court of Appeal confirmed that a change in the wording of the Social Security Legislation in 2005 meant that if a couple had gifted $54,000.00 per year in reduction of the debt that only one amount of $27,000.00 would be counted with the balance of $27,000.00 being declared to be excessive gifting.

Accordingly, a couple owning a house worth say $800,000.00 would take almost 30 years to gift the value of that home reflected in the debt created as a result of the sale of that house to the trust. This period is just too long for most people to contemplate.

Consider also, that the family home is exempt for the purposes of an application for the residential care subsidy by one of a couple, so that the only person who would benefit from the gifting as is now allowed would be the survivor of a couple whose gross assets (prior to their gifting programme) were more than the $218,000.00 approximately that is currently allowed.

What this article is effectively proposing is that if your family trust owns only one home and exists predominantly to protect the family home from the asset testing regime administered by the MSD that the settlors of family trusts should seriously be considering winding up the trusts and distributing the family home back to themselves.

Smith and Partners was one of the firms of solicitors involved in the Bridgeford case which we and the other solicitors involved completed on a pro bono basis in respect of the applications to both the High Court and the Court of Appeal. We are accordingly well versed in respect of the Social Security legislation and can best advise you as to what to do.

Each family trust will have different circumstances. Whether of not you should wind up your family trust depends on the reasons you have for continuing your family trust balanced with the changes to gifting law in New Zealand and the ways in which the Courts and Government are interpreting these laws.

The best advice is to check in with your family trust lawyer to ensure that you are up to date with these changes and to discuss the best course of action for your individual situation.