Winz and losers over family trusts

By MARY HOLM

Q: Having had a recent experience with Work and Income NZ in regard to an application for NZ Super for a couple with one unqualified partner, I thought I would relay this to you.

About three years back, when I was 62 and my wife was 57, we established a family trust and moved our home and a range of unit trust and share investments into it. These investments were designed to provide growth, and what little income they made was reinvested.

When we set up the trust, it was indicated to us that if we were in a means-testing situation, the assets in the trust would not be included - particularly as we weren't taking distributions from the trust. My financial adviser also said he was confident my wife should get her entitlement as an unqualified spouse.

But when making our application to Winz, we were handed a form that contained a handwritten question, "Do you have a family trust?" This then generated the request that we provide it with full details of the trust, gifting programmes, annual accounts and so on.

It valued the investments at the date of application and then applied an earning potential to these, to determine if this income would affect our qualification. The basis it used was up to $4160 a year jointly with no clawback, and then 70 per cent of all other income.

The result is that we will receive a very small allowance, even though as individuals we have no income. It used Section 74d of the Social Security Act 1964 to support its decision.

Winz staff indicated they had been stung by some very wealthy people who did not disclose their true position and that Winz was becoming much more vigilant in regard to family trusts.


A: I'm pleased to see you acknowledge that what's happened to you may be fair. First, let's look at the legal situation.

Bill Patterson, a partner with Minter Ellison Rudd Watts, says he thinks it's not clear whether Winz acted correctly: "The section of the Social Security Act referred to requires proof that what has been done was done so as to enable someone to qualify for a benefit or to get an increased benefit.

"If the trust was created at least three years before your reader was eligible for superannuation, and not for that reason, the section should not apply."

He adds, though, that "I assume there was a sale agreement, with the price being left owing interest-free and repayable on demand. So there may be some doubt as to how this interest-free debt should be treated."

Patterson also says he's surprised that Winz is routinely asking for details about family trusts.

Winz disagrees with Patterson on several counts.

A spokeswoman says this issue "has been dealt with on a number of occasions by the Social Security Appeal Authority (SSAA) and the High Court." The Social Security Act 1964 says it is intended "to aid those who are truly in need of financial assistance".

This intent is explained further in a High Court decision, where Justice McGechan stated: "It is policy to provide benefits where there is need; but it is likewise policy to expect claimants to call upon their own resources, and the resources of those properly obliged to them, before calling on the State."

The spokeswoman adds that the Section 74(d) that you refer to says the Winz chief executive has discretion to "refuse to grant a benefit, or to grant a benefit at a reduced rate, or to terminate or reduce a benefit already granted, where a person has directly or indirectly deprived themselves of any income or property, which results in them qualifying for a benefit or increased rate of benefit".

The spokeswoman, quoting two High Court decisions (Blackledge and Keenan), says: "There is no requirement that the depriving must be for the purpose of qualifying for a benefit or that the person should have the specific motive of obtaining a benefit." She also says that the Social Security Act 1964 "does not specifically state any time frame within which the discretion under section 74(d) must be exercised". A Winz spokesman adds that its main points are:

* A person's intention in setting up a trust is largely irrelevant. "The department does not want to be drawn into making value judgments about what it looks like a trust was set up for. That would be fraught."

* "The length of time a trust has been operating may be more relevant."

However, "I am mystified by Mr Patterson's suggestion that anything done three years ago or earlier should be ignored.

"If he was correct, then of course every person who may be eligible for NZ Super in the next five years and who wanted to have their spouse included (assuming the spouse was not able to claim in their own right) would simply need to transfer all their assets to a trust at least three years prior to applying!"

* "The department tries very hard to be fair, and that is why we ask people to tell us about all of their financial circumstances, including their trusts.

"We want people to be treated the same regardless of how they have chosen to structure their finances, although we respect absolutely people's right to manage their affairs as they see fit.

"The Social Security Act requires the chief executive to investigate every claim for a benefit."

Patterson, in turn, doesn't swallow everything Winz says. He thinks the main issue is timing and motive. "How much time lapses between setting up a trust and applying for a benefit may indicate the real motive." He adds that he referred to three years because you set up your trust three years ago.

"In my view, Winz are probably reading more into those cases than they really justify. Every one of them is going to turn on its particular facts.

"This situation again reinforces the necessity for anyone thinking of setting up a family trust to protect their assets to do so sooner rather than later," he says.

"There are many good reasons for creating a family trust. But the more it looks as though a trust was set up for a specific purpose, such as obtaining an income-tested welfare benefit, the more likely it is that the trust will be carefully scrutinised."

To which I add: "And so it should be." As I've said before, I don't like the way well-off people with family trusts often end up getting Government support.

Patterson is right. There are good reasons for setting up trusts. But just because you've got a trust doesn't mean you should take taxpayers' money that you don't need.

I know, though, that not everyone thinks that way.

If you feel hard done by, there are two courses of action.

First, you could take up with the people setting up the trust and your financial adviser that they gave you incorrect information on your entitlement to NZ Super.

"If in fact the assertions were able to be proved," says the Winz spokesman, "then on the face of it the readers would appear to have received negligent advice and they may be entitled to damages (being the difference between the full NZ Super and what they are currently receiving)."

Second, you can have the Winz decision reviewed by a Benefits Review Committee. If you're still unhappy, you can appeal to the SSAA.

By the way, from Monday Winz will be the Ministry of Social Development, although the "front-line sites" will still be called Work and Income NZ.

Q: The contributor writing about Efficient Market Theory in your September 15 column was bang on target, and I'm surprised you of all people give EMT any credence. Surely EMT implies that shares are at fair market value, when in reality it only reflects market sentiment. In effect, it simply rationalises today's prices, not their values.

For instance, the Nasdaq was hugely overpriced, with price:earnings ratios in the stratosphere. The prices had no relationship to value, and value is what true investors want. Otherwise, buyers (you can't call them investors) are acting on the Bigger Fool Theory, which has now been proved. I reckon the Bigger Fool Theory just about sums up the EMT.

PS: Warren Buffett may be the outstanding example of value investing, but is hardly the only one.

As Buffett would say, "If you're so smart, how come I'm so rich?"


A: "Perhaps, Mr Buffett, because you're lucky." As analyst-turned-academic Burton Malkiel puts it: "Luck may be 99 per cent responsible for the success of the very few people who have beaten the averages" in share investment.

With many thousands claiming the ability to pick the right shares, somebody must come out on top. What's more, Buffett hasn't always been right. But I don't want to get into a Buffett battle. He's done extraordinarily well, and good on him.

For the benefit of others:

* The Bigger or Greater Fool Theory says, according to Malkiel, "It's perfectly all right to pay three times what a stock is worth, as long as later on you can find some innocent to pay five times what it's worth." I should add that Malkiel calls it a "castle-in-the-air theory".

* The Efficient Market Theory says that share prices react quickly to new information. That means it's hard for investors to consistently do well by picking shares. Any good or bad information they have about a company is likely to be already reflected in its share price.

There's nothing in all this about fair market value - a notoriously difficult concept. We need only look at the widely varying share values experts come up with during a takeover.

Certainly it often seems, in hindsight, that shares have traded at way above or below what their value turned out to be. As you say, the high-tech Nasdaq shares are an example.

Still, at the time, buyers of those shares thought the companies' future earnings prospects were so bright that the shares were worth more than they paid - or that they would find a greater fool to buy from them.

It was only as new information came to light, and was accepted by market players, that prices fell. That, surely, was EMT at work.

I think you're expecting too much of EMT. It doesn't make markets fair. It just makes it hard to beat market performance.

* Mary Holm is a freelance journalist and author of Investing Made Simple.

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