Trust assets can be assessed for benefits
The cautionary tale of a man who hid the existence of his family trust while drawing benefits contains lessons for anyone legally impoverishing themselves.
Many people use trusts to render themselves virtually assetless, owning all manner of things like homes, cars, rental properties and investment portfolios behind the protective walls of a trust.
They do it for various reasons such as reducing the likelihood of creditors ever getting their hands on assets that would otherwise be in their own names.
But should hard times strike and settlors be forced to seek asset and income-tested benefits, Work and Income has the power to take trust assets into account when deciding whether to grant all or part of a benefit.
In some cases, as a recent decision by the Social Security Appeal Authority, shows, the benefits agency can calculate the income a person could have earned off the assets they have gifted away and count that towards the income test for benefits.
Beneficiaries of trusts may also be asked to go cap in hand to trustees to ask for help in meeting day-to-day needs.
Where benefits are income-tested, Work and Income will use techniques including estimating the income that would have been produced by assets - bought in the hopes of capital gains - if they had been invested in bank term deposits.
They do that in cases where assets in the trust are investment assets such as rental properties.
In the case that came up before the authority, the man was contesting a demand from Work and Income to repay $28,466.51 in unemployment and sickness benefits, accommodation allowance and disability allowance after the benefits agency realised he had significant assets squirrelled away in a trust. These assets had not been disclosed when the benefits were applied for.
He had gifted $260,000 in savings to the trust in 2001, depriving himself of the money and the income it generated.
The man argued the Work and Income forms did not ask specifically about trusts, and also said that the agency continued to pay him benefits for more than a year after it learned of the trust. The authority found that the delay in investigating was "unreasonable", noting the investigation had been "shelved" for almost one year.
The man also disputed Work and Income's decision to count profit from the sale of a rental property as income for the purposes of income testing, but the authority found that was correct.
The authority found the debt should be paid back.
Work and Income told Sunday Star-Times that a person who gifts their home into a trust and continues to live there would not be income-tested as if they had deprived themselves of an asset that could have been producing them income.
"This is because a person who personally owns and occupies a house as his primary residence is not expected to generate income from the residence."
But, it said: "If the person owned the primary residence personally and vacated it to live elsewhere the former residence changes its character and becomes a cash asset capable of generating income for the owner via rentals from third parties.
"Nine times out of ten the settlor is appointed as one of the trustees of the trust as well as a discretionary beneficiary of the trust. In many instances the trust deed gives the settlor the power of appointment and removal of trustees and/or beneficiaries."
But, even those with no control must be aware Work and Income will be interested in their status as a beneficiary of a trust, even if they did not found it.
"If the trustees allocate any of the trust's income to the (discretionary beneficiary) applicant this will be taken into account when assessing his benefit entitlement."
- © Fairfax NZ News
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