Forgiving Debt and Residential Care Subsidy Entitlements
Abolition of Gift Duty
Gift Duty was abolished on 1 October 2011.
This presents an opportunity for Settlors of trusts to forgive debts owing to them by the trust without incurring duty, an action that has some considerable attraction (if only because it will avoid the annual gifting programme undertaken up to now). However, all is not so simple, especially where those Settlors might wish to be eligible for residential care subsidies at some time in the future.
Purpose of Trusts
There are a number of reasons why family trusts have been created in the past, including:
Up to now, when a trust was set up, the assets transferred to the trust were sold to it with a debt back to the settlor (normally interest free and repayable on demand), a debt which has then been reduced in each year by a debt forgiveness programme of $27,000 per annum per settlor (and one that did not have taxation implications given that the forgiveness of the debt was out of what is described as “natural love and affection” for the trust and its beneficiaries).
Until such time as the debt is fully forgiven, the debt itself remains an asset of the settlor and the remaining debt balance is taken into account when determining eligibility for a residential care subsidy. However, it is also possible for some of the debt that has been forgiven in the past to be clawed back as an asset of settlor when considering eligibility for a residential care subsidy.
Asset Limits for Residential Care Subsidies
The amount of the assets threshold for eligibility changes each year, but from 1 July 2014, the limits are:
Where the applicant has a spouse/partner, and only one requires care, the combined asset threshold is a choice (to be made by the applicant) of $218,423 (including the value of their residence and car) or $119,614 (excluding the value of their house and car).
Where the applicant does not have a spouse/partner, or where both spouse/partners are in care, the asset threshold is $218,423 (including the value of the residence and car)
There are some modest exemptions from the threshold count, including pre-paid funeral cost, household furniture and personal belongings. There are also some “unexpected” matters that are taken into account in the determining the value of assets “owned” for subsidy purposes, including:
Any gift that exceeds $6,000 per year in each of the five years before a residential care subsidy application is made.
Any gift of more than $27,000 per couple (or for a person without a spouse/partner), made outside of this five year period.
The latter add-back gives rise to the issue about gifting off the balance of debt now.
If a large gift of assets is made (or a large amount of debt is forgiven) after 1 October 2011, there will be a large amount of “excess” gifting taken into account in the threshold assessment for eligibility for a care subsidy. For example, if you and your spouse make a one-off gift after this date for say $300,000, and this happened more than 5 years prior to the applying for a subsidy, only the first $27,000.00 of that gift will be allowed (per couple) with the balance of $273,000 being treated as your personal asset. This is more than the above noted threshold of $119,614 so you would not be eligible for a subsidy.
When applying for a subsidy, you have a requirement under the law to make full disclosure about your trust including its income, assets, transfers of assets to it (or directly to family members), and gifting, all of which are without time limit. The main reason why this review is undertaken is that the subsidy is, in effect, a welfare benefit, and Government considers that it should assist only where the claimant has limited assets and has not given away significant amounts of assets in the past.
For the Future?
I have a personal view that in the fullness of time, Government is going to look toward the assets of family trusts to be the first port of call when it comes to paying for residential care. With an ageing population I believe that Government will not be able to afford the annual care cost of about $40,000 to $45,000 per person. If this change is made in years to come, then it will not matter at all whether or not the bulk gifting is done now. If it is, the assets of the trust could well be deemed to be assets of the claimant; if it is not, then the claimant will continue to own the debt asset. In each case, either you or your trust will be called upon to pay the cost of care.
This change is simply my guess at present. However, the idea is not without precedent given that Government has already gone some distance in this direction with respect to the eligibility for family assistance (the income of trusts are effectively taken into account when determining what is described as “family scheme income”). If this deeming action is brought into being at some time in the future with respect to residential care subsidy applications, then gifting, be it annual amounts or a one-off large amount, will be irrelevant. If the combined assets of the claimant and the trust in which they are, or are deemed to be a settlor of, exceeds the then threshold assets test, no subsidy will be available.
Forgive the full debt balance now if:
Creditor protection is more important than anything, and you have no great desire to seek residential care in the future
If the amount of debt to be forgiven is large, and there would seem little prospect of forgiving the balance (at $54,000 per annum) before a subsidy is likely to be applied for
If your personal assets are greater than the above threshold amounts and are likely to remain yours into the future
You feel philosophically (given that your own assets and those of the trust are reasonably significant), that you should pay for your own care
You have no concerns about divesting yourself of assets (and becoming reliant upon your family or future trustees for your well-being in your old age)
You do not have any issue with current potential insolvency (debt forgiven when insolvent, or when nearing insolvency, can be clawed back following bankruptcy)
Continue with annual gifting if:
The debt balance is not that large and the balance can be gifted off (at $27,000 per annum for a couple) within say the next 5 years
You have a desire to be eligible for care subsidy at some time in the future
Before deciding on what course of action to follow, your particular situation should be discussed with us (and, as need be, with your lawyer) in order to determine that all relevant matters have been considered.