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The following articles were written by Brent Selwyn:
June 2011 - Will The Abolition Of Gift Duty Affect Your Ability To Qualify For a Residential Care Subsidy?
As has been highlighted in previous articles on the subject, gift duty is to be abolished with effect from 1 October 2011. The question on the minds of seniors will be what effect this will have on their ability to qualify for asset and income tested benefits and in particular, the Residential Care Subsidy for senior care.
A key point to note is that the abolition of gift duty requires an amendment to The Tax Administration Act. This is the act, administered by the IRD, which presently contains a requirement for gift duty to be paid on gifts in excess of $27,00 within a 12 calendar month period. It is this provision which is to change from 1 October this year.
Entitlement to benefits on the other hand is administered by the Ministry of Social Development under the auspices of The Social Security Act 1964. Importantly for seniors it should be noted that there is to be no equivalent change to the social security legislation.
It is a basic tenet of our social security system and in particular, that pertaining to senior care that we should first look to the use of our own assets before we seek financial assistance from the state to pay for our care. Readers will be aware that the residential care subsidy is both asset tested and income tested. It is the income tested component we will concentrate on in this article.
With effect from 1 July 2005 the then Labour government introduced changes to the system as we then knew it. Prior to then the exempt asset limits had been very low and the system immensely unpopular with those who had elderly relatives in care. The amount of exempt assets that either a single person or a couple may have when looking to apply for a residential care subsidy has been steadily rising by $10,000 per annum on July 1st each year to the extent that a single person (or a couple where both are in care) may now have $200,000 in exempt assets and a couple where one is in care may have $105,000 in exempt assets in addition to the family home, which is exempt as an ‘asset’ for that purpose if a spouse or dependent child resides in it.
On July 1st this year those limits will once again rise to $210,000 and $115,000 respectively. However, under the Social Security Act there is no ‘allowable gifting’ amount for general benefits. In other words, we are required to use all available resources to support ourselves rather than look to the state. This will not change with the abolition of gift duty.
That is not to confuse the issue of Residential Care Subsidies where a small amount of ‘allowable gifting’ is permitted in the lead up to an application for a subsidy. This provision has always been (and will remain) out of synch with the gifting regime under the Tax Administration Act.
At present, when assessing an application for a residential care subsidy Work and Income (as agent for the Ministry of Social Development) will permit a gift of $5,500 in each of the five years preceding your application for a subsidy. From 1 July this year that allowable gifting level is to rise to $6,000 per year for each of the five years before your application for a residential care subsidy.
In addition, gifts of $27,000 per year are allowed for gifts made more than five years before your application. This is unchanged from existing policy. So, what does that all mean for senior’s looking to protect their hard earned assets? In essence it means that little or nothing will change. In looking at available asset protection and estate planning measures which you might utilise, the timing of any transaction as well as the purpose will still be paramount.
There are strong anti avoidance provisions under the Social Security Act to the intent that if you are seen to have deliberately deprived yourself of an asset which ought to otherwise have been available to pay for your care, then such disposition of property can be overturned.
In summary therefore, all seniors should be looking at how they own their assets and doing so in a timely fashion and with clearly defined goals in mind other than simply qualifying for a benefit you might not otherwise qualify for.
Harmans has had a team working exclusively in the area of senior law for over 12 years now and a cornerstone of our service is that we offer an initial appointment at no charge to you. Only if you then elect to engage our services do you incur fees. If you are looking for a Christchurch Solicitor specialising in senior law we invite readers to contact our seniors representative Fleur McDonald on 352-2293 to arrange your complimentary appointment to review your situation.
May 2010 - Budget 2010 - The Nuts & Bolts
After all the waiting and hype surrounding this budget we were finally put out of our misery on Thursday 20 May with the Honorable Bill English releasing details of the long awaited second budget for this National government.
I say long awaited because, in this instance there were teasing hints dropped to the press over two months ago about some of the changes we could expect to see on budget day. One of those ‘hints’ surrounded the treatment of depreciation and tax losses for rental properties and the early signaling by the government of its intentions in those areas caused an almost overnight ‘cooling’ of the property market, at least in that sector.
On budget day we saw the increase in Goods & Services tax to 15% effective from October 1st this year. That was no surprise and we had all become conditioned to expect such a change. The fact is that this is only second increase in GST in New Zealand since the act was passed in 1986 and GST in this country is low compared to equivalent taxes in other countries. There are arguments surrounding whether some commodities should be exempt from GST and I will not get into that issue here.
In a surprise move which no-one seemed to expect, the government signaled its intention to lower company tax to 28% from the 2011/12 income year whilst at the same time as lowering personal marginal tax rates as follows.
Income $0-$14,000 now to be taxed at 10.5%
Income $14,001-$48,000 now to be taxed at 17.5%
Income $48,001-$70,000 now to be taxed at 30.0%
Income over $70,000 now to be taxed at 33.0%
These changes take effect from 1 October 2010. The government’s contention is that at all levels the increase in after tax income will rise by more than the increase in GST and that in providing relief for top wage and salary earners, the government have recognized that this band of taxpayers are the largest group of consumers in society and also, that the top 10% of taxpayers, pay about 75% of all tax paid.
The company tax rate and top personal marginal tax rate will now therefore be out of step with the trustee tax rate which remains at 33% when it would have seemed more sensible to the writer if those three top rates were all set at the same level.
In the past there has been the ability to have income producing assets owned by a family trust and make a saving of up to 6 cents in the dollar (when the top marginal rate was $0.39c) by having income retained in the trustees hands and therefore taxed at $0.33cents rather than treated as beneficiary income where the allocation of income to a beneficiary might have seen that beneficiary pay tax (or more tax as the case may be) at the old top marginal tax rate.
With the top marginal tax rate and the trustee tax rate now to be at the same level, those who have income producing assets owned by their trusts will therefore do so with the motivation of building wealth in their trust and to ring fence tax paid capital safely in the trust for future generations.
Also with effect from the 2011/12 income year, no depreciation deductions will be allowed for buildings with an estimated useful life of 50 years or more. This will apply to rental houses and commercial buildings alike. Furthermore, the rules relating to the treatment of tax losses in a Loss Attributing Qualifying company (LAQC) are to change also with shareholders no longer able to choose to have losses deducted at their personal marginal tax rate. LAQC’s will likely therefore simply become ‘flow through’ entities with income and losses flowing through to shareholders. It is expected that losses claimed by a shareholder will be limited to the extent of that person’s investment (or equity) in the company.
For seniors there is a rise of 2.02% in super payments from 1 October 2010 to offset the rise in GST. This is in addition to any benefit from the across the board personal income tax rates and in keeping with Mr Key’s pledge to keep national super at 66% of the after tax average wage.
Obviously there is more to the budget than this simple summary but those points seem those nearest and dearest to New Zealander’s hearts.
Harmans has a point of difference among law firms in Canterbury in that it is proud to have a dedicated seniors department. We offer home visits at no additional cost to clients and an initial home visit of up to an hour which we guarantee to be free of charge. You only incur cost with us if you then elect to engage our services, at which stage we would supply you with a written terms of engagement for the work to be undertaken. We welcome readers of Older & Bolder to call the writer or our seniors representative Fleur McDonald on 352-2293 for a no obligation consultation in relation to any area of senior law.
May 2010 - User Pays Subsidies
Today we live in a 'user pays' society and if you have saved for retirement and paid off the house it just might be that you are disadvantaged, at least when it comes to senior care. That hardly sounds fair does it? But the fact is that it costs between $40,000 and $42,000 per annum to keep a person in senior care and with more and more people going into care as the baby boomers hit retiring age and beyond, the New Zealand government simply cannot afford to cover this cost.
By doing the prudent thing and saving for your retirement and paying off the mortgage on the family home you have very likely decreased your eligibility for a residential care subsidy under the current rules. For some time now, the cost of keeping a person in senior care has been subject to a 'user pays' regime and qualifying for a residential care subsidy has been subject to you first using your assets and income until you reach the allowable levels.
So, what are the asset thresholds? You may recall that the previous Labour government changed the thresholds effective from the 1st of July 2005 and decreed that the asset limits would rise by $10,000 with effect from July 1 in each year until in theory asset testing would no longer exist. As of 1 July 2009 a single person (or a couple where both are in care) may have $190,000 in assets and a couple where only one is in care may have $95,000 in assets in addition to the family home, which is exempt while a partner or dependent child are living in it.
The foolproof way to protect your assets is of course to transfer them to a family trust in an appropriate and timely fashion.
If after weighing matters up you feel that a trust is not a viable option for you, perhaps because you feel that you may have left it too late and time is not on your side, the fact of the matter is that there are other options available to you. The sad thing is that often people have not been advised by their lawyer of simple matters relating to how you own your property and how this can affect your eligibility for an asset tested subsidy.
Property Ownership Issues
There are two common legal forms of joint ownership of property and the purpose of this part of the paper is to inform you of the differences between those forms of ownership, and to outline the reasons why you might choose one over another and, to consider how the manner in which you own your property can affect your eligibility for an asset tested subsidy!
The first of the common forms of legal ownership is the Joint Tenancy. A majority of married people and many others in qualifying relationships under the law, own their properties as joint tenants. The significant feature of this form of ownership is that on the death of the first owner, the property automatically passes to the survivor by way of a rule of law known as Survivorship. It does not matter what is in your Will, or for that matter, whether you even have a Will, your surviving partner will take the entire property in his or her own name. The property is not administered under the Will of the person who has died. This can have far reaching consequences which we will outline in this part of the paper.
The second common form of legal ownership where two (or more) people own property together is the Tenancy in common. Quite simply, this form of ownership allows for property to be owned in distinct shares. The most common form is tenancy in common in equal shares, but, by creating a tenancy in common, ownership can be in unequal shares. Significantly, the rule of survivorship does not apply and as a consequence what happens to your share of the property on your death depends entirely on what you state in your Will. You can choose to leave your share in any given property to someone other than your surviving spouse, should you so desire.
How can the way in which we own our property influence our eligibility for a Rest Home Subsidy?
As has been stated, if property (and by this we mean all property whether it be real or personal) is owned as joint tenants, on the death of the first owner, the property passes to the survivor. If the last surviving owner should at some later stage require either long stay hospital care or rest home care, they will have to meet Work and Income criteria before qualifying for any assistance in the form of a residential care subsidy. The family home is included as an asset and must be declared. The home will often need to be sold to pay for rest home care.
You may qualify for assistance before the sale of the home by arrangement with Work and Income but they would take a charge known as a Residential Care Loan (similar to a mortgage) over the home. Any funds advanced for your care against the home are then repayable when the home is ultimately sold.
Because of this situation, there is a strong possibility that you should consider a tenancy in common as your preferred form of ownership. We will now consider in more detail the reasons why.
Life Interest Will
As stated earlier, if property is owned by two or more persons as tenants in common, they are free to leave their share of the property in such manner as they choose in their Will. We will look specifically at the situation of a husband and wife who together own their family home as tenants in common in equal shares.
By owning your property in this manner, you are then able to leave a type of Will, known as a life interest Will. As you would do normally, you appoint one or more trustees (say for example your children) to administer your estate after your death. The significant difference is that you then leave your share of the property (in this case a half share) to your trustees and instruct them in the Will that they are to allow your surviving spouse to live in the property for the remainder of his or her lifetime. Upon the ultimate death of the survivor, the share of the property then goes to the final or residuary beneficiaries (more often than not the children).
The significance of this is that the survivor now owns in his or her own name only a one half share of the property. The other half share is then recorded on the Certificate of Title as being in the name of the Trustees of the estate and to be dealt with as specified in the will. Therefore, should the survivor ever end up going into care and wishing to apply for a residential care subsidy, in making any declaration to Work and Income about the extent of their assets, they do not need to declare ownership of the other half of the dwelling, quite simply because in law, they do not own it. They enjoy only a life interest in that half share of the property.
So, although the family home might still have to be sold (or at least charged by Work and Income as discussed earlier in this paper) to pay for your care, only the sale proceeds from the half of the property owned by you (subject to the allowable asset limits) needs to be used for your care. Because residential care subsidies are also income tested, if the family home were sold and the proceeds from the sale of your late spouses share invested, the income from that would also need to be used for your weekly care. Significantly though, the capital is preserved and upon the death of the survivor, it goes to the final or residuary beneficiaries (more often than not the surviving children of the marriage or relationship).
There are strong anti avoidance provisions in the Social Security Act and the Chief Executive of Social Welfare is able to set aside a transaction which might be deemed to have had the effect of intentionally depriving you of an asset which might otherwise have been available to pay for your care. The message to be noted is that timing is everything.
We strongly advise you to consider the tenancy in common and the use of life interest wills as an option if you feel it is too late for you to set up a family trust. If this step is taken in a timely fashion and as a genuine estate planning and succession tool it ought not to be challenged in any way by Work and Income.
May 2010 - Enduring Powers of Attorney
Do you have Enduring Powers of Attorney in place? If not, you may care to read on to see what could be a likely scenario in the event of your losing mental capacity for any reason, be it old age or an unforeseen accident or illness.
Firstly, you might ask "What is an Enduring Power of Attorney?" Pursuant to an Act of Parliament called 'The Protection of Personal and Property Rights Act 1988', every person is able to put in place types of power of attorney known as Enduring Powers of Attorney. These powers of attorney come in two forms, one for personal care and welfare and a second, for property matters. In relation to our personal care and welfare, we can only appoint one attorney at any given time, but in relation to our property matters, we can appoint two or more if so desired.
The distinct difference between these types of power of attorney and a 'traditional' power of attorney is that as the word 'Enduring' suggests, the Enduring Power of Attorney remains in full force and power if for any reason we lose mental capacity. Any other type of power of attorney ceases to be of effect on loss of mental capacity.
If you are thinking that you've heard all this before, you might care to stop and think for a moment, what happens if you lose mental capacity for any reason and you do not have Enduring Powers of Attorney in place! The Protection of Personal and Property Rights Act anticipates this situation, and provision is made in the Act for an application to be made to the Family Court for someone to be appointed as either a personal welfare guardian or a property manager.
However, whereas it might cost you around $400 - $500 per person to put in place Enduring Powers of Attorney for property and personal care and welfare whilst you are of sound mind, if application has to be made to the Court, following your sudden or unexpected loss of mental capacity, the costs are likely to be dramatically higher. Why is this and how much could it cost you might ask?
The simple answer is that it can cost several thousands of dollars to put in place arrangements, which could have been made for a fraction of that price with a little foresight. The reason for this is that in circumstances where an application to the Court is necessary, not only do you have a solicitor representing the person making application to be appointed as welfare guardian and/or manager, but there is also an independent solicitor appointed by the Court to represent the person for whom the power of attorney is required. A percentage (usually half) of that independent solicitor's fees are usually met from a Government Consolidated Fund, but the remainder must be paid out of your own funds.
Before making an appointment as welfare guardian or manager, the Court must be satisfied that there is a genuine loss of mental capacity and it is necessary to seek medical opinions and a report is then filed with the Court by the independent solicitor. If the manager is to have the ability to deal with property in excess of $120,000 in value, this requires the consent of the Court also.
Sadly, the expense does not necessarily stop once an order of the Court is granted, as the orders for appointment of manager and/or welfare guardian must be reviewed in the Court every three years, requiring the same process to be followed once again and further costs are incurred.
Because the costs involved in having a manager and/or welfare guardian appointed by the Court are considerable, there can sometimes be circumstances where it may not be appropriate to incur the expense. Take for example a situation where there is an obvious loss of mental capacity but the person does not have any significant property in their name. It might be argued in those circumstances that it ought not to be necessary to apply to the Court to have a welfare guardian appointed, particularly where there is a surviving spouse or partner.
Changes to Protection of Personal and Property Rights Law
Effective from the 26th of September 2008 significant changes to the law dealing with Enduring Powers of Attorney have come into effect.
The Enduring Power of Attorney regime first came into being with the passing of the 1988 Protection of Personal and Property Rights Act.
Over time limitations with this legislation became apparent with occasional abuse of the power of attorney by attorneys. Furthermore, upon loss of mental capacity by the Donor, there was no reporting requirement on the attorney.
In 2001 a report was published by the Law Commission which highlighted a number of potential areas of abuse of Enduring Powers of Attorney including:
- Insufficient protection for the donor when making an Enduring Power of Attorney, particularly in relation to a donor not being properly advised when signing.
- Attorneys failing to consult with a donor to protect the interests of the donor.
- The fraudulent use of Enduring Powers of Attorney.
In 2007 an Amendment Act which modified the original Act in certain areas was passed and new prescribed forms came into effect on 26 September 2008. Some of the significant changes to the Act and the focus of the Enduring Powers of Attorney are as follows:
- The Donor of the Enduring Power of Attorney must now have his or her signature witnessed by a solicitor or registered legal executive and the witness must be independent of the attorney. Therefore, if a lawyer acts for a husband and wife and they wish to appoint each other as attorney, then the Donor will need to be referred to another firm for independent advice. Whilst this will lead to increased costs, the hope is that the new requirements will lead to better protection for Donors at the time of appointment of an attorney.
- The new prescribed form for the appointment of a property attorney contains certain options which did not form part of the old forms.
- One such option is for the appointment of a successor attorney where the appointment of an attorney has ceased.
- Another option allows for the donor to require the attorney to consult with certain specified people in exercising their power - these might include a spouse or other siblings where one of your children is appointed as your attorney.
- The Donor can also require the attorney to provide specific information relating to the exercise of the Enduring Power of Attorney to a nominated person or persons if those people request such information.
- If the Donor wishes the attorney to be able to benefit themselves or other specified persons after the donor’s loss of mental capacity this can also be specified in the Enduring Power of Attorney.
The Amendment Act also places a requirement on the witness to sign a certificate certifying that they have witnessed the execution of the Enduring Power of Attorney, they are either a practicing lawyer or registered legal executive, that they have explained the effect and implication of the Enduring Power of Attorney and that the Donor had mental capacity when they signed the form.
Notwithstanding that the new requirements will lead to increased costs, an Enduring Power of Attorney is a valuable document. The alternative if one loses mental capacity and does not have an Enduring Power of Attorney is an application to the Family Court and likely cost about $2,000 - $3,000.
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