A case of misplaced trust..?

Are you considering setting up a trust (or continuing with a trust) in order to protect your family home? Is your primary motivation for doing so to avoid paying for rest home fees in the future?

If you've answered "yes", then you need to carefully consider your actions. Recent legal and political trends in the way family trusts are treated have raised the question of whether it's worthwhile having a trust for this purpose. Contrary to popular belief, the answer in many cases is probably not.


Depending on people’s particular circumstances, trusts are still a valid legal structure to hold assets, and historically there have been a number of different reasons for establishing a trust. One major reason for the significant growth in use of Trusts in recent years is a desire to keep assets out of reach of the government in the event of elderly requiring rest home care subsidies.

However, with the abolition of gift duty in 2011, the aging population and the arguably cash-strapped state of government coffers, times are a-changing in terms of judicial and political attitude towards how trusts are regarded.

Until fairly recently, it was lawyers' understanding that the government department which assesses people for rest home subsidies – the Ministry of Social Development (MSD) – would generally only look back a maximum of 5 years in terms of asset gifting to a family trust. However, decisions over the last 2 years indicate fairly clearly that the MSD’s view now is that it may legitimately disregard any asset gifting made to a family trust, regardless of the amount or when it was made. In two recent cases, the MSD went back 20 years or longer in assessing what the personal assets of the applicants should be.

In essence, any transfer of assets to a family trust maybe considered "deprivation of assets" (and therefore reversible) and although the reasoning of the MSD is less than clear in these cases, the trend is towards the view that all asset transfers to trusts can potentially be disregarded.

In these specific cases, the family trusts had significant assets over and above just the family home, however many of the family trusts that we see on a daily basis own just the family home and so just how the MSD might treat this kind of situation is uncertain. To illustrate, the following problematic situation could easily arise: If Partner X needs rest home care but Partner Y still lives in the family home, Partner Y could find himself out on his ear if it is deemed by the MSD that the couple’s family trust is liable to meet the rest home costs. This is because the family home won’t quality as an “exempt asset” under the legislation if it is owned by the family trust rather than personally by Partner Y.

A better solution in this type of situation might be to actually wind up the family trust and transfer the family home into the personal ownership of the couple as separate half shares, (or re-settle the family home into the ownership of two separate trusts) with a contracting-out agreement used to evidence the separate ownership of the assets, and the use of life-interests in each of the partner’s Wills. In the event of one partner dying and the surviving partner requiring rest home care, or a partner requiring rest home care whilst the other partner remains in the family home, there is a higher probability of being able to protect at least one half of the value of the family home.

We realise that this is probably quite alarming and disappointing news to people who have been advised for some years to transfer the family home into the traditional joint family trust structure, and who have gone to the effort and expense of carrying out gifting over many years in order to protect their major asset.

Please remember that everyone’s circumstances are different, so a trust may still be the right structure for you. If you're in any doubt at all, please contact us.

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