Trusts not bullet-proof for asset protection

Asset test or no asset test, many elderly people have received publicly funded care without having to hand over most of their worldly goods, thanks to a family trust.

However, a trust isn't a bullet-proof answer.

When people apply for the Residential Care Subsidy, Work and Income asks whether they have given away any of their assets.

Typically, that question looks back five years. Anything given away in that time, beyond $5000 a year, can be counted as an asset.

The five-year rule isn't hard and fast; Work and Income says it can look back further if it believes people have given away excessive amounts.

The lesson for anyone hoping to use a family trust in this way is to start early. That's because it can take time to transfer assets into a trust.

The usually quoted figure is $27,000 a year, or $54,000 for a couple, which is the maximum that can be gifted to a trust before gift duty applies. You can transfer more but doing so will add to your tax bill.

Even a moderately valuable family home, for example, can take several years before it is fully transferred into trust ownership.

If you hope to avoid the asset test, that process needs to be finished at least five years before you apply for the subsidy.

Family trusts aren't the only strategy.

Another is for a couple to own their home as "tenants in common" rather than the more usual "joint tenants" and for each partner to make sure his or her will says that, when one dies, the survivor can continue living in the house.

When the first partner dies, the other doesn't inherit half of the house - it goes to the dead partner's estate - but can still live there.

If the surviving partner later has to go into care, he or she has to declare only half the value of the house.

If both spouses end up in a rest home, the arrangement won't reduce the impact of the asset test.

As always with legal issues, good advice is vital, since Work and Income can challenge arrangements which it believes were set up solely to avoid the asset test.