Residential Care Subsidy & Asset Testing in NZ

Your mum's been managing at home with a bit of help, but after her recent fall, the hospital discharge planner suggests it's time to consider residential care. The shock isn't just emotional. When you start researching costs, you discover aged care facilities in New Zealand charge between $1,000 and $2,500 per week, sometimes more. Over a year, that's $50,000 to $130,000.

You wonder: will Mum have to sell her house? Can the government help? What about that advice your neighbour gave about gifting assets to the kids five years ago?

Understanding how the Residential Care Subsidy works, and particularly how asset and income testing determines eligibility, is essential for families navigating this transition. More importantly, knowing what doesn't work (like panic-gifting assets after an aged care assessment) can save considerable stress and expense.

The Residential Care Subsidy is a government payment that helps cover the cost of long-term residential care in an aged care facility for people who cannot afford to pay the full fees themselves. It's administered by Work and Income, part of the Ministry of Social Development.

Unlike NZ Superannuation, which everyone receives at 65 regardless of wealth, the Residential Care Subsidy is means-tested. This means your eligibility depends on your income and assets. The subsidy is designed as a safety net, not a universal entitlement, so the government looks at what resources you have available before stepping in to help.

The subsidy doesn't cover everything. Residents receiving it still contribute from their income (including NZ Super) and may need to pay an additional amount from their assets, depending on the assessment outcome.

When you apply for the Residential Care Subsidy, Work and Income conducts a financial means assessment that examines both your income and your assets. For 2024/25, the asset threshold is $269,886 (as confirmed by Work and Income). This figure is adjusted annually and applies differently depending on your relationship status.

What assets are included?

• Cash, savings, and term deposits
• KiwiSaver balances
• Shares, managed funds, and other investments
• Property (including your family home, with important exceptions)
• Vehicles beyond one exempt car
• Boats, caravans, and other recreational assets
• Life insurance policies with a surrender value
• Assets held in certain trusts (see below)

What's typically exempt?

• Your family home, if your spouse or partner continues to live there
• One motor vehicle
• Household furniture and personal effects
• Prepaid funeral plans up to certain limits

The home exemption is critical. If you're single and moving into care, your home is generally counted as an asset. If you're partnered and your spouse remains at home, the house is exempt from the assessment. This protects the remaining partner from being forced to sell the family home to fund your care.

Even if you qualify for the subsidy based on assets, you're expected to contribute most of your income toward care costs. For someone receiving NZ Superannuation, nearly all of that payment goes toward the care home fees, with a small personal allowance retained for spending money.

Other income sources also count, including:

• Interest from savings and investments
• Dividends
• Rental income from property
• Private pensions or annuities
• Earnings from part-time work (rare for residential care residents, but possible)

Work and Income calculates your maximum contribution based on this income. If there's a shortfall between what you can pay and what the care home charges, the subsidy covers part or all of the difference, depending on your asset position.

Here's where many families trip up. Faced with an aged care assessment, some people quickly gift money or property to their children, hoping to reduce their assessable assets below the threshold. Unfortunately, Work and Income anticipated this, and the rules are designed to prevent it.

Under the gifting provisions, any assets you give away within five years before your assessment date are treated as if you still own them. This is sometimes called the "deprivation of assets" rule. The logic is straightforward: if you gave away $100,000 two years ago to avoid paying for care, Work and Income adds that $100,000 back into your asset calculation.

This rule applies to:

• Cash gifts to family members
• Transferring property into children's names for little or no payment
• Selling assets below market value to relatives
• Transferring assets into certain family trusts (trusts established within five years are generally included)

Example scenario: Your father has $300,000 in savings and investments. In 2023, worried about future care costs, he gifts $150,000 to you and your siblings. In 2025, he needs residential care and applies for the subsidy. Work and Income will assess him as having $300,000 in assets (the remaining $150,000 plus the $150,000 gifted within five years), putting him above the threshold. He'll need to spend down those deemed assets before becoming eligible, even though the money is no longer in his possession.

There's no "loophole" here. The five-year lookback is strictly enforced, and trying to hide gifts or transfers can result in serious consequences, including repayment demands and potential fraud charges.

Family trusts are sometimes promoted as a way to protect assets from aged care means testing. The reality is more nuanced. Whether a trust protects your assets depends largely on when the trust was established and who benefits from it.

Generally, if you set up a trust and transferred assets into it within five years of applying for the subsidy, those assets are still counted as yours. If the trust was established more than five years ago, the assets inside it may be excluded from your assessment, but Work and Income will scrutinize the arrangement carefully.

Factors they consider include:

• Whether you or your spouse are beneficiaries of the trust
• Whether you retained any control or ability to benefit from the trust assets
• Whether the trust was genuinely established for legitimate estate planning reasons (not just to avoid care costs)

Trusts established decades ago as part of genuine family succession planning or farm transfers are more likely to be respected. Trusts set up hastily as someone approaches care age are not. The key principle: you cannot deliberately make yourself poor to qualify for a government subsidy.

It's also worth noting that family trusts come with ongoing costs (legal fees, accounting, trustee responsibilities) and complexity. They may be useful for estate planning, but treating them primarily as an aged care avoidance strategy is generally ineffective and potentially costly.

A common situation: someone owns their home outright (worth $800,000) but has modest savings and only NZ Super for income. They're single, need residential care, and don't qualify for the subsidy because the home is counted as an asset, putting them well over the threshold.

Families in this position face difficult decisions:

• Sell the family home: Use the proceeds to pay for care. Once assets drop below the threshold, the subsidy kicks in.
• Rent out the home: Generate income to help cover care costs while retaining the property. However, rental income is also assessed, and the home remains a countable asset.
• Obtain a reverse mortgage or home equity release: Access the home's value without selling, though this comes with interest costs and reduces the eventual estate. (You might find our article on reverse mortgages helpful for understanding this option.)

None of these options are easy, and each has significant emotional and financial implications. The key is understanding that the subsidy is designed to step in once personal resources are genuinely exhausted, not to preserve inheritances or family property.

While last-minute asset shuffling doesn't work, thoughtful planning years in advance provides more options and peace of mind. Here are factors to consider long before aged care becomes necessary:

Have honest family conversations early. Discuss potential care preferences, financial situations, and expectations around inheritance while everyone is healthy and clear-headed. These conversations are uncomfortable, but they're far easier than making rushed decisions during a medical crisis.

Understand the five-year rule as a planning horizon. If you're in your early 60s and considering significant asset transfers (for legitimate estate planning reasons), understand that those transfers may need to happen well before care is ever needed. Speak with a lawyer who specializes in elder law and estate planning to understand implications.

Consider long-term care insurance. While not common in New Zealand, some insurance products can help cover aged care costs. These need to be purchased well before you're likely to need care, typically in your 50s or early 60s.

Optimize your retirement income sources. Structuring your savings and investments to generate reliable income in retirement can help cover care costs if they arise. Our guide on structuring retirement savings explores this in more detail.

Keep good financial records. If you do make legitimate gifts or transfers years before care is needed, document the reasons and timing carefully. This transparency helps if you later need to demonstrate to Work and Income that these weren't last-minute deprivation of assets.

Plan your estate with aged care in mind. Rather than trying to hide assets, structure your estate planning to be clear about your wishes while understanding that care costs might reduce what's eventually left to pass on. Legal advice here is valuable. Consider reading our estate planning basics as a starting point.

When the time comes to apply for the subsidy, here's what the process typically involves:

1. Needs Assessment: Before you can apply for the subsidy, you need a needs assessment from your local Needs Assessment and Service Coordination organisation (NASC). This is a health professional who determines whether you require residential care based on your medical and support needs. You cannot apply for the subsidy without this assessment. Your GP or hospital discharge planner can refer you to NASC.

2. Choose a Care Facility: Not all aged care facilities are the same. Some are fully subsidized (they accept the government subsidy as full payment once you've contributed your assessed amount), while others charge additional fees on top. Understand what you're signing up for.

3. Complete the Financial Means Assessment: Work and Income will ask for detailed information about your income and assets. This includes bank statements, property valuations, investment statements, and details of any assets transferred in the previous five years. Be thorough and honest. Incomplete or misleading information delays the process and can result in penalties.

4. Wait for the Assessment Outcome: Work and Income will calculate your asset and income position, determine your eligibility, and advise what (if any) subsidy you'll receive and what your personal contribution will be.

5. Ongoing Reviews: Your financial situation will be reviewed periodically (typically annually) to ensure the subsidy remains appropriate as your assets and income change.

If your assets are just above the threshold, you'll need to spend them down before becoming eligible for the subsidy. This is called "spending to the threshold." The money must be spent on legitimate costs, including:

• Paying for your aged care during the initial period
• Paying off debts
• Purchasing necessary items or services
• Prepaying your funeral

You cannot simply give the excess away to family. Work and Income tracks what happens to your assets, and gifts made after your assessment (or in the five years before) remain counted against you.

Once your assets fall below the threshold, you become eligible for the subsidy, and the government picks up the shortfall between what you can pay and what care costs.

Myth 1: "If I give away my assets now, they won't count in a few years."
Reality: Five years is a long time. If you're already in declining health or approaching an age where care is likely, you probably don't have five years before an assessment. And even if you do, giving away assets has other consequences (loss of control, potential family disputes, tax implications for recipients).

Myth 2: "The government will take everything, including my house."
Reality: If you're partnered and your spouse stays in the family home, the home is exempt. If you're single, the home is counted as an asset, but you're not forced to sell immediately. You might rent it out or eventually sell it to fund care. The government doesn't "take" your house, you use your assets to pay for your care.

Myth 3: "Trusts protect all my assets from aged care costs."
Reality: Only trusts established more than five years before assessment, and which genuinely remove your benefit and control, might protect assets. Even then, Work and Income scrutinizes these arrangements closely.

Myth 4: "I can hide assets and Work and Income won't find out."
Reality: Work and Income has access to considerable information, including IRD records, property ownership databases, and bank account data. Hiding assets is fraud, and the penalties are severe.

One of the most stressful scenarios is when one partner needs residential care while the other remains at home. The rules are designed to protect the at-home spouse from impoverishment, but navigating this requires careful attention.

Asset split: When one partner enters care, assets are typically split 50/50 for assessment purposes. The at-home spouse retains their half, which is not counted toward the care resident's means test. The care resident's half is assessed against the threshold.

Income protection: The at-home spouse keeps their own income (including their NZ Super) to maintain their household. The care resident's income goes toward care costs.

Home protection: As mentioned, the family home is exempt if the at-home spouse continues to live there.

This structure means that in many cases, a couple with modest assets beyond their home can access the subsidy relatively quickly, without the at-home partner losing financial security. It's important to understand these protections exist so panic decisions (like selling the house immediately) aren't made unnecessarily.

Beyond the technical rules, there's an emotional dimension to aged care and asset testing that families struggle with. Adult children sometimes feel entitled to an inheritance and view the "spending down" of parental assets on care as unfair. Parents feel guilty about not leaving more behind, or frustrated that a lifetime of saving is depleted in a few years of care.

It's worth remembering: the Residential Care Subsidy exists to ensure everyone can access dignified care in their final years, regardless of wealth. Those who can afford to pay do so. Those who can't are supported. It's a social insurance model, similar in principle to our public health system or NZ Super.

Trying to manipulate the system to preserve inheritances while accessing public subsidies is ethically questionable and practically ineffective. Instead, families who accept that care costs are a legitimate use of lifetime savings, plan realistically, and focus on quality of care rather than asset preservation tend to navigate this stage with less conflict and stress.

This article is general information only and does not constitute personalized financial advice. For advice tailored to your situation, speak with a licensed Financial Advice Provider. You can find a registered adviser at fma.govt.nz. For specific questions about Residential Care Subsidy eligibility, contact Work and Income directly or speak with a lawyer specializing in elder law.