Beginners guide to aged care – Part 4: Funding and estate planning issues

In the fourth and final instalment of our aged care series, we discuss the potential issues involved in funding your move into an aged care facility and the impact on your estate planning.

Income and Asset Assessment

Before you move into an aged care facility, an assessment of your income and assets is carried out. Centrelink uses this assessment to calculate the costs you are required to pay to live in an aged care facility.   While this sounds relatively straightforward, it is important to be aware of what exactly can be included in the assessment.

Income test

Income will include any income you receive from a family business, for example, if you are a partner of a partnership or a beneficiary of a family trust.  Income may be attributed to you even if have not actually taken drawings from the business and do not intend to do so in the future.

As such, it is important to review the structure of your family business before you decide to move into an aged care facility to ensure that you are not attributed income which you do not actually receive.

Assets test

 The assets test includes any property in your name even if you do not receive any financial benefit from the property.  For example, your share in the family farm that is now being farmed by the next generation of your family.

Your home is generally considered an asset in your assets test unless at the time of the assessment one of the following people is living in it:

  • your partner (spouse or de facto partner).
  • a close relative who has lived in your home for 5 continuous years immediately before you move into aged care and is eligible for a government income support payment.
  • a carer who has lived in your home for 2 continuous years immediately before you move into aged care and is eligible for a government income support payment.

Assets will also include any debts owing to you.  For example, if you sold the family farm to your adult child/ren and a loan was owing to you to ensure your financial security, that loan will be counted as an asset in your assets test.

Problems that can arise when paying the refundable accommodation deposit (RAD)

As discussed in part 1 of our aged care series, there are several options for paying your accommodation costs (which are means tested) in an aged care facility.  The RAD is an upfront and lump sum payment you make when you move into the facility.  Upon leaving, the RAD is refunded less any agreed deductions.

A number of issues can arise when it comes to funding the RAD, particularly if you need to sell your home to fund the RAD, or a family member is paying the RAD for you.

Sale of house to pay the RAD

You may need to sell your home to pay the RAD.   This will prove difficult if:

  • You have lost capacity and do not have an enduring power of attorney (EPOA).
  • You own your home jointly with your spouse and you or your spouse have lost capacity and does not have an EPOA.
  • You have an EPOA but it has not been properly drafted to allow conflict transactions, i.e. you cannot use any of your spouse’s share of the sale proceeds for your own purposes, for example to buy a downsized home for yourself or to pay a RAD for yourself.

Selling your home to pay the RAD can also cause issues for your will and estate plan if:

  • You have specifically gifted the home in your will, but you sell the home to pay for the RAD, the intended beneficiary of your home may lose that gift altogether as the home has been converted into the RAD.
  • Upon your death, the RAD (which is refunded from the aged care facility less agreed deductions) will not automatically pass to the intended beneficiary of your home but will fall into the rest and residue of your estate which may pass to a different beneficiary.
  • You lose capacity and your attorney sells the home on your behalf, the beneficiary to whom the home was gifted in your will could take action on your death to recover the market value of the home from your estate.

Other issues can arise when purchasing a home in a manufactured home estate, retirement village or other types of aged care facilities.  You should always review your estate plan in conjunction with such a significant change in your principal residence as it may necessitate a change to your will or enduring power of attorney.

Family member pays RAD on your behalf

 If you have a family member who is paying the RAD on your behalf, it is important to consider the following:

  • Does the family member intend that the money will be repaid to them or do they intend it to be a gift? If you do not have a written loan agreement in place, the payment will be treated as a gift and upon your death, the RAD will be paid to your estate.  Depending on how your will is drafted, this may mean the money is ultimately paid to other family members and not repaid to the person who thought they were lending it to you.
  • The amount of your RAD balance is taken into account when Centrelink calculates your means-tested daily care fee. As discussed in part 1 of our series, this fee covers the personal and clinical care services provided by the aged care facility.  If the RAD balance means your assets exceed the asset threshold of the asset test discussed above, you may have to pay a higher means-tested daily care fee.  However, if there is a properly documented and secured loan agreement in place, this will not be the case.
  • It is important that you have a properly drafted EPOA to allow a family member to lend the RAD to you in the event you lose capacity.

What steps should I take now?

If moving into an aged care facility is a possibility for you (and let’s face it, we may all end up there one day!), we recommend that you:

  • Sit down with your lawyer, accountant and financial planner to review your financial circumstances and asset structures and consider how you are going to fund your move into the facility.
  • Talk to your family members about your plans.
  • Seek legal advice from an experienced estate planning lawyer and ensure you have a well drafted will and EPOA.

For more information please contact our estate planning team at Fox and Thomas.