Transitioning into aged care brings a mix of challenges for families, touching on emotions and finances alike.
Among the most daunting choices is whether to liquidate a beloved family home to finance the cost of aged care. Understandably, this dilemma is frequently met with apprehension and uncertainty, so much so that most families do everything in their power -including attempting to bend the rules – to try and keep the family home.
With close to 20 years of industry experience, financial planner Rob Jeselnik, from Wealth Dimensions Financial Group, sat down with HelloCare to provide readers with some invaluable insights into the complexities of financing aged care as a home owner.
The first of which is simply knowing who to approach for guidance.
“In the realm of aged care, financial planners are unequivocally the most equipped to offer informed guidance,” Jeselnik asserts. “Accountants often lack expertise in aged care matters, and even if they possess such knowledge, regulatory constraints actually limit their ability to provide advice.”
Jeselnik cautions against relying solely on financial advice from aged care providers, citing potential conflicts of interest. “While aged care facilities may possess comprehensive knowledge of financial strategies, their vested interest in occupancy and profitability may compromise the objectivity of their recommendations,” he cautions.
“Consequently, seeking guidance from neutral entities such as Centrelink Financial Information Service officers is a viable option for some. However, they can only provide general information. They are a free service but can’t recommend personal financial strategies. “
House Hiding
Financial means testing is pivotal in determining the financial obligations of individuals entering residential aged care in Australia. This occurs through the combined assessment of income and assets.
The family home often represents a significant portion of an individual’s assets, and if included in the assessment, it could result in higher means-tested care fees or accommodation costs.
For this reason, some families attempt to conceal the value of the family home from means testing by transferring it into the name of a family member or friend. However, this strategy is complicated and fraught with risk.
“The decision to try and retain the family home, while understandable, can inadvertently erode entitlements to pension benefits and escalate aged care fees,” reveals Jeselnik.
“Assets gifted above stipulated limits remain subject to assessment by Centrelink for five years. Meaning, that unless you have transferred the home into someone else’s name 5 years prior to seeking aged care, Centrelink will still class that as your loved one’s asset and means test accordingly.”
By concealing the value of the home, individuals may seek to qualify for lower fees or subsidies, preserving more of their assets for inheritance or other purposes.
People seeking aged care with very low assets (below $58,500) plus very low income (below $32,331) will be assessed by the Australian Government as being ‘low-means.’ People who have been judged to be ‘low means’ incur no financial fees to enter residential care.
Jeselnik warns that while hiding assets from means testing may seem like a good idea to some, it can be detrimental to your loved one’s aged care experience.
“If the government funds your entry into aged care, you may have to wait longer to find a place, and the quality of the room may be to a lower standard so you’re probably not going to have the choice of entering the best facilities,” says Jeselnik.
“Not to mention, the family home often ends up being sold anyway following the death of the owner.”
RADical Thinking
Through a combined assessment of income and assets, the means-tested care fee is calculated, reflecting the individual’s capacity to contribute towards their care costs. This fee is in addition to accommodation costs, which can be paid through various options such as a refundable accommodation deposit (RAD) or a daily accommodation payment (DAP).
The RAD is a lump sum payment made to the aged care facility, which is fully refundable when the individual leaves the facility or passes away. The amount of the RAD is determined by the facility and can vary widely depending on factors such as location, amenities, and room type.
On the other hand, the DAP is a daily payment made to the aged care facility to cover accommodation costs. The DAP amount is calculated based on the remaining RAD balance (if any) and the government-set interest rate, known as the Maximum Permissible Interest Rate (MPIR).
“If you’re hoping to retain the family home, the best case scenario is that your loved one has enough money in the bank, Superannuation or other assets to cover the cost of the RAD (which is commonly $500K – $550k) and the daily care fee (which can often be covered in full by an individuals aged pension,” states Jeselnik.
“That way, the family can keep the family home and receives all of the RAD money back when their loved one passes away.
Families who cannot afford to pay the Refundable Accommodation Deposit (RAD) with cash upfront have several options available to them to manage the cost:
Payment Plan: Some aged care facilities offer payment plans for the RAD, allowing families to pay the deposit in instalments over time. This can make the payment more manageable and alleviate the need for a large lump sum upfront.
RAD Loan: Families may choose to take out a loan specifically to cover the RAD. Some financial institutions offer RAD loans designed for this purpose, allowing families to borrow the required amount and repay it over time with interest.
Combination of RAD and DAP: Families can opt to pay a portion of the RAD upfront (or not pay a RAD) and cover the remaining balance with a Daily Accommodation Payment (DAP). This reduces the immediate financial burden while still securing accommodation in the aged care facility.
It’s essential for families to carefully weigh their options and consider the long-term financial implications of each choice – hence the need for professional advice that can speak to an individual’s specific financial situation.
“The family home is often a testament to the owner’s hard work which holds deep sentimental value for families, but the quality of care and how the aged care facility environment matches the needs of your loved one should always be the first priority,” states Jeselnik.
“Everyone’s financial circumstances are different, but if you’re upfront and disclose the full financial and personal circumstances to a financial planner, the best options available to you will stand out very quickly after they crunch the numbers.”
This is good advice when considering residential aged care as an option in the near future. But remember that the Australian government is undertaking a major review of their support for all types of aged care and everything is likely to change in the next couple of years regarding fees and costs, and when this happens you may need all the professional advice you can get.
Very well written. There are a couple of points to be added.
1) The value of the former home is an exempt asset in age pension assessments for the first two years after permanent entry. With average occupancy just over two years, retaining the home may be an option, especially as the value of any home is means tested as $201,231, no matter what its sale value may be.
This option minimises the means tested care fee.
2) A loan used to pay a RAD has gone out of fashion since 2016, when the loan liability was determined by Government to not be an offset against the RAD asset – thus increasing the means tested care fee. The only exemption would be if the resident would be paying the maximum means tested care fee in full each year.
We normally use an aged care loan to pay DAP fees and other costs.
Paul Dwyer
Aged Care Credit adviser