Gifting threshold shock for residential care subsidies

B v Chief Executive of the Ministry of Social Development [2012] NZHC 3165
 
In this decision the High Court has dealt with an uncertain question about entitlements to residential care subsidies. It is an important decision because it focuses on the extent to which trusts can receive and hold assets while a beneficiary of the trust seeks government support for long term residential care.
 
To understand the significance of the case it is necessary to know more about the way claims to residential care subsidies are limited. Briefly the Social Security Act and Regulations provide that if a claimant’s means exceed a threshold figure, they lose the right to a care subsidy until their excess assets have been applied towards the costs of care. The threshold is adjusted periodically.
 
When a claimant’s means are being calculated, certain transfers of assets that have been made by them, such as to a trust, are clawed back and added to the value of assets retained in their personal name. The claw-backs are made on the assumption that the excess gifts are in realty available to meet the care of the applicant. That assumption is not always correct, including when gifts have been made outright to others and have been disbursed. However, the policy behind the regime is that you cannot expect to divest yourself of significant assets and still qualify for a long term residential care subsidy. 
 
The claw-backs are not limited to trust transfers and include all gifts, such as to family members. Two claw-back periods are important. The first is a period of 5 years before an application for the subsidy and the second is all years predating that 5 year period.
 
In the first of these periods gifts exceeding $6,000 per annum can be clawed back and assumed to be available to the claimant. In the second gifts exceeding an annual threshold can be clawed back. A key question in the case was how the annual threshold applies. In short the question was whether gifts of $27,000 per couple or $27,000 per applicant could be made without claw-back.
 
There is an historical significance to this figure. For decades before the abolition of gift duty, an exemption applied to gifts of $27,000 per annum per person so that a married couple gifting off the value of assets transferred to trust typically gifted $54,000 per annum. The contest in the case was whether the same approach applies to the calculation of the threshold for the residential care claw-back.
 
The Ministry of Social Development denied the claimant a subsidy. It calculated that her available assets were above the allowable threshold, because excessive gifts by her husband and her to their family trust were clawed back. The decision went to the Social Security Appeal Authority which sought the High Court’s view on questions of law.
 
The Court has held that, although the $27,000 threshold was the same for both gift duty and the care subsidy threshold, it was intended to apply in different ways. The former applied to spouses individually but the latter applies to them jointly. Thus the “additional” $27,000 that the claimant and her spouse had gifted into trust over many years in order to reduce debt without gift duty, was clawed back.
 
This decision means that it almost inevitable that most historical transfers of property to trusts will exceed the annual threshold allowed under the residential care subsidy rules. The mismatch between gift duty exemption and the care subsidy rules will have led many people undertaking an orthodox gifting program to “over gift” for the purposes of the care subsidy rules.
 
The removal of gift duty means that gifts into trust can now be made without duty consequences and that is likely to lead to many cases where even greater excessive transfers occur than when the duty exemption limit applied something of a brake on gifting.
 
© G D Clews