Family Trust and Residential Care Subsidy NZ: Do Trusts Still Protect Assets?

The Trust Protection That May Not Be There

For decades, New Zealand families set up discretionary family trusts partly to protect the family home from rest home costs. The logic was simple: if the house belongs to the trust, it is no longer a personal asset and should not count in the means test. But the reality is more complicated, and many families discover too late that their trust does not provide the protection they assumed.

Work and Income has broad statutory powers to look through trust structures when assessing eligibility for the Residential Care Subsidy. After the landmark Chief Executive of MSD v Broadbent [2019] Court of Appeal decision, the rules were clarified but trusts remain vulnerable to challenge.

How Work and Income Looks Through Trusts

When an applicant or their partner has been involved with a family trust, Work and Income examines several factors to determine whether trust-held assets should be treated as personal assets for subsidy purposes.

Transfer below market value. If property was transferred to the trust for less than its fair value, the difference is classified as gifting. Gifting within the five-year window is subject to the $8,500 per year per couple limit, and excess amounts are added back to the asset total as deprivation.

Ongoing control and benefit. If the settlors retained practical control of the trust, continued making decisions about trust property, or lived in the trust-held home rent-free, Work and Income may argue the assets are effectively still theirs.

Debt-back arrangements. Many trusts were structured with a "debt back" where the trust owes a debt to the settlors for the purchase price of the property. The outstanding balance of this debt is a countable asset belonging to the applicant. As the debt is progressively forgiven within gifting limits, the countable amount decreases over time.

Notional income on debt-backs. Work and Income can assess notional interest income on the outstanding, unforgiven portion of a trust debt. The rate used is the Reserve Bank of New Zealand's six-month term deposit rate. However, following Broadbent, MSD cannot impute notional income on assets that have been fully and legally gifted to the trust within the allowable limits.

The Broadbent Decision: What It Changed

The Broadbent case clarified important limits on what Work and Income can and cannot do with trust assets.

What MSD cannot do: Calculate fictional returns on assets that have been permanently gifted to the trust within the statutory limits. Once an asset has been legally gifted and accepted by the trust, it is trust property and its potential yield cannot be used to inflate the applicant's assessed income.

What MSD can do: Assess notional interest on outstanding, unforgiven loan balances owed by the trust to the applicant. If the trust owes $200,000 to the settlor under a debt-back arrangement, that $200,000 is a countable asset and MSD can impute interest income on it.

The offset principle: If the applicant did not charge interest on a loan to the trust, but lived rent-free in the trust property, MSD can offset the interest foregone against the value of the free rent. If the resident paid rates, insurance, and maintenance, this is treated as a normal tenancy and no offset applies.

The Risk of Winding Up Your Trust

Since the Trusts Act 2019 introduced stronger compliance requirements, many families have wound up their trusts to save on ongoing administration costs. Elder law specialists consistently warn that returning trust assets directly to individual names immediately makes those assets countable for the financial means assessment.

If a family is considering winding up a trust and one or both settlors may need residential care in the near future, the timing of the wind-up can be financially devastating. Legal advice before taking any action is essential.

What Families with Trusts Should Do

Before applying for the Residential Care Subsidy, get the trust's current financial statements, the original trust deed, a schedule of all gifting and debt forgiveness between the settlors and the trust, and confirmation of whether the trust property was transferred at fair market value.

An elder law specialist can assess whether the trust structure provides genuine protection or whether Work and Income is likely to look through it. This consultation typically costs $300 to $500 but can save tens of thousands if it reveals a vulnerability that can be addressed before the application.

What the Trusts Act 2019 Changed

The Trusts Act 2019 introduced new compliance obligations for all New Zealand trusts, including mandatory record-keeping, trustee duties codified in legislation, and requirements to provide basic trust information to beneficiaries on request. Many simple family trusts found these obligations disproportionate to their purpose and wound up.

For families where rest home care is a possibility in the next five to ten years, the decision to wind up a trust should never be made without considering the residential care implications. Assets that are safely held in a properly administered trust may lose all protection the moment they are returned to individual ownership.

Conversely, maintaining a trust solely to protect assets from the rest home means test carries its own risks. If Work and Income determines the trust was established or maintained primarily for that purpose, it can look through the structure regardless of its legal validity.

The Practical Bottom Line

Family trusts can provide some protection from the residential care means test, but only if they were established well before the need for care arose, assets were transferred at fair market value, the settlors genuinely relinquished control and benefit, and the trust has been properly administered with contemporaneous records.

Trusts established in the last five to ten years, trusts where the settlors continued to live in the trust property rent-free, and trusts with outstanding debt-backs provide significantly less protection.

The NZ Residential Care Subsidy Guide includes a trust assessment checklist that maps out each factor Work and Income examines, helping you prepare for the financial means assessment with full documentation.

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