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taxation of gifts was repealed with the result that gifts of any size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.
