In episode 7 of their Tech Tips podcast, National Technical Managers Peter Kelly and Mark Teale discuss the various options regarding a person's home on entering aged care - from selling to renting; and the impact of a child paying the Refundable Accommodation Deposit including the benefits and pitfalls. Read the edited transcript below or listen to the full episode here.
There was an article that was published in the Australian Financial Review on 10 November 2020 addressing whether children of an older person paying the Refundable Accommodation Deposit (RAD) when their parent has to enter residential aged care. Mark addressed this in a post that he wrote in our Realise your Dream blog.
Let's break this down and address some of the issues that occur when an elderly person has to enter residential aged care, and they don't have a lot of assets apart from their residence. The situation we're going to talk about today covers an elderly lady; she's a widow; she owns her own home, which is worth around $1 million. She has approximately $90,000 in the bank and another $5,000 in personal use assets. She's lived in this home for more than 40 years, and all of the children have grown up there. So, there's a strong sentimental attachment to the house. It's also believed that the potential future value of the home is undoubtedly more than what its current value is. And we have several children here that are keen to hold onto the house.
Now, mum's going into residential aged care. She found a facility that she likes, and they've quoted a refundable accommodation deposit (RAD) of $450,000 to enter the aged care home. But mum doesn't have $450,000 readily available. Does she actually need to pay the RAD?
Thanks, PK. When somebody enters aged care, they can enter under one of two classifications - either as a 'low means' resident, or a 'standard fee-paying' residence. These categories are based on a person's assets.
It's not necessarily just the cash you hold. It's all the assets you own. In this particular case, we're talking the $1 million home plus her $90,000. The fact that she doesn't have $450,000 in cash does not mean she doesn't have to pay the RAD. In this case, because of those assets, she would be a standard fee-paying resident.
If someone's assets are above $171,535.20, they would typically have to pay a refundable accommodation deposit. The interesting thing is the $171,535.20 is the capped value of a person's home. So, even though her house is worth $1 million, it would still be assessed (for age care purposes) at $171,535.20. As she is above this cap (because of her savings), she would have to pay a refundable accommodation deposit to get into her chosen facility. The question is, how does she pay for the RAD?
The AFR article mentioned a strategy where one or more of the children offered to pay the RAD for mum. So, in this scenario, let's say there are three children or four children in the family, and one of them offers to pay the RAD, what are the implications?
It's important to look at the way aged care fees are calculated. One of the assets taken into consideration when assessing a person's age care fees is the RAD. If a child pays the RAD, which means mum is no longer paying the interest on the unpaid RAD, that RAD is still taken into consideration.
What this means is that if the RAD isn't paid upfront, there will be an interest charge of 4.1% on that unpaid amount. That is equal to about $50.55 per day, and this charge is called the daily accommodation payment. Her means-tested care fee based on her circumstances, based on the RAD not being paid upfront, are about $2.75 per day.
Now, if the children pay the $450,000 RAD, the daily accommodation payment ($50.55 per day) is no longer charged. However, regardless of who paid the RAD, the RAD is still taken into consideration when calculating age care fees. So, mum's means-tested care fee will jump from $2.75 per day to around $23.57 per day. This is quite a substantial jump in her means-tested care fee.
While she's no longer paying the $50.55, she's now paying $23.57, meaning that there's a minus cash flow. But it becomes even more exaggerated in two years because, at that time, mum's $1 million home becomes an assessable asset for the purposes of the age pension. As a result, mum will lose her age pension. So, while one problem is solved by paying the RAD upfront, there is still a need to solve the problem that the age pension will disappear in two years.
Wow. There are just so many potential traps for players here. Let's assume that your child has paid the refundable accommodation deposit then their mum passes away. Now the RAD has the word refundable, which means at some stage it is paid back. So in this scenario, is the RAD refunded to the child who actually paid the RAD in the first place, or does something else happened with it?
This is where it becomes even trickier. What actually happens is the RAD is refunded to mum's estate, not to the child who's paid the $450,000 when mum entered the home. This $450,000 is now subject to the wishes of mum's will and distributed according to that document. You would hope is that the child who paid the $450,000 would get it back when mum passes, but I have seen some situations where that hasn't happened. Instead, the children have requested that the $450,000 remains as part of the estate. So it then becomes an issue of making sure that mum's will has been updated, or the relevant legal documents put into place to ensure the $450,000 is actually given back to the child who made the original payment.
And this all presupposes, of course, that mum has the legal capacity to amend her will or to enter into some other form of legally enforceable arrangement. I can see this could potentially be a problem if it's not dealt with properly.
It certainly can PK and I think the relevant issue is the one you've mentioned - whether mum has the mental capacity to change her will once she's gone into the nursing home or even before she's gone into the nursing home. And that then means do you need to get extra legal documents put into place to ensure that $450,000 comes back to the child who's paid the deposit.
Yes, it is complex. There's nothing simple about family situations, particularly where residential aged care becomes involved. So, let's work on the assumption that none of the kids can pay the RAD, and they don't want to sell the home. What else is available in this situation? How best could we manage mum's residential aged care needs?
I think the important thing to remember is that her fees are such that her age pension when she goes into aged care, which is a full age pension, is not going to cover the costs. So, she has to then to look at ways of generating income somewhere else. Yes, she's got $90,000 in cash, but that will only last for so long. So, one of the obvious ways to generate income is to rent the home, and then look at what the impact is to mum's cash flow.
Let's assume that we can rent mum's house for $600 a week. That $600 is assessed by Centrelink. Centrelink allow one-third of the rent to cover the costs of renting a home, meaning that around $400 per week is considered. Her means-tested care fee will jump a little bit. Her means-tested care fee without the RAD being paid would be around about $2.57 per day. That means-tested care fee would jump to around $14 per day.
So, her age care fees are $52.25, which is the basic daily fee, plus the means-tested care fee, which is $14.38. Because she's now renting her home, her age pension has reduced to around about $615 per fortnight.
As a result, she's still a little short in her cash flow, but she's not as bad. Where the issue will come again, is that after two years, the $1 million home becomes an assessable asset and mum's age pension goes from $615 per fortnight to nothing. So, the cashflow shortfall jumps from a couple of thousand per year to somewhere around $15,000 to $16,000 per year.
This really is quite confusing. What would be the situation if mum and the children decided to sell the home and pay the RAD from the proceeds? Surely that would result in a much more favourable outcome from a cash flow perspective?
Well, that's probably the simplest way to manage the move into aged care; and it's one that the majority of people end up doing as it becomes too challenging to try and rent the home and meet the cost for mum inside the aged care facility. And then look at her age pension situation further down the track.
Let's look at what it means if mum sells the home and pays her $450,000 RAD from the proceeds of the home - assuming that the home is sold for $1 million. Mum pays the $450,000 deposit, which leaves her with around $640,000 in cash. Now she's got a lump sum of cash, which will provide her with more income. For the purposes of her age care fees, she's no longer paying that daily accommodation payment. Her means-tested care fee will jump to around $44. 09, and she's still paying the basic daily fee of $52.25. Her age pension will reduce to $456 per fortnight. So it's not an issue of a cash flow position or not knowing what's going to happen to the cash flow in two years. As such, there's a degree of consistency in the ability to manage the cash flow going forward.
Now, it's not always going to be the ideal position for people. And we do see a lot of families who are quite reluctant to sell mum's home, or they perceive it as their family home. And the options are quite diverse.
I think it's essential that all options are explored before a decision is made. That helps to ensure that people understand what their fees are going to be, what the ramifications may be for their age pension, and what the ramifications are going to be for their cash flow position as well.
So, if they want to hold on to the family home, then maybe the kids have to be prepared to chip in in some way and subsidise mum's shortfall in her cash flow?
I think that's certainly an avenue because from the perspective of a pension, or of age care fees, the children providing her with a weekly income to cover some of those fees are not seen as income. So that could be a possible outcome.
Okay, Mark, thank you very much for sharing your thoughts with us. It is a very complex area. And it's not a case of one size fits all. You'll have three clients that might appear on the surface to have similar circumstances or similar outcomes. But each one is different. And it's not just a matter of dealing with mum or dad who's going into residential aged care. But when it comes to providing advice in this space, it is reflecting on the needs and wishes I suppose of the entire family.