A Case For Life Interest Wills

It is becoming increasingly difficult to place yourself in a position of being entitled to a residential care subsidy through gifting your assets into a trust.  While gift duty has been abolished as from 1 October 2011, the Ministry of Social Development’s residential care policy is remaining unchanged. Your gifts may still be clawed back and added to your total assets in a financial means assessment. For further information on gifting and the residential care subsidy, please see our article Abolition of Gift Duty and Your Trust.

Life interests created through Wills can often be an effective means of enabling the surviving spouse to obtain a residential care subsidy through having only half of what were the joint assets taken into account in the residential care subsidy application.

For example:

1. John and Mary own a house valued at $400,000, have $100,000 in term deposits and a car.  They are aged 78 and 75 respectively and receive national superannuation and interest on the term deposits as their income.
2. They establish life interest Wills and change the ownership of the house into a tenancy in common where each of them has a distinct half share and divide the term deposit equally between them.
3. If John needs residential care and Mary continues to live in the house, the car and the house and up to $119,709 are allowed – John would receive a residential care subsidy.  The life interest wills, tenancy in common and split term deposits would not alter this situation.
4. John dies and Mary is left with half of the house in her name, the term deposit in her name and the car.  She has a life interest in John’s half of the house and receives the income from John’s term deposit.
5. Mary subsequently needs residential care.  The house is sold for $420,000 (net) and Mary give the car (value $6000) to her granddaughter.  Mary has $210,000 in her name from the sale of and $50,000 on term deposit.  The current WINZ criteria allow gifts of $6,000 per annum and a total of $218,598 in combined assets (as at July 2015).  Mary can reduce the cash she has by establishing a funeral trust for up to $10,000 – this is allowed by WINZ.  The combined assets amount of $218,598 will be adjusted each July.  Mary will not currently be eligible for a care subsidy but will be entitled to one within one or two years with further gifting of $6,000 per annum and the use of some of her capital in paying for her care in the meantime.
6. John’s estate will have $260,000 in it from the sale of the house and his term deposit.  This sum is not included in the assets declared in Mary’s application for the WINZ subsidy.  Depending on the terms of the life interest the income received by John’s estate may not need to be included in Mary’s WINZ application either – and can be accumulated in the estate or paid to the residual beneficiaries in his estate – his and Mary’s children.

Without the life interest Wills and the divided assets survivorship would apply and all of the cash ($500,000) would be in Mary’s name. It would be a long time before she could successfully apply for a WINZ subsidy.

A deed should be completed between the couple creating life interest Wills whereby it is agreed that neither one will alter their Will to remove the life interest without the consent of the other.

Two trustees are required in each Will to ensure that the interest in the estate of the first of the couple to die is kept separate from the survivor’s interest in any jointly held property.

Usually a survivor has reasonably full use of the assets in the deceased spouse/partner’s estate for their lifetime and the income from them.

For further information, or to discuss life interest wills please contact Tony Fortune, Lauren Corbett or Katherine McCarthy.