Setting the Scene
For the last little while you have been helping your mother around the house, and getting her to medical appointments, however as time goes on her needs are getting greater and your ability to take time off work, or out of your normal routine is getting smaller and smaller
The family meets and Mum decide it’s time for her to go into Residential Care.
You find a great facility with a RAD of $550,000 and start looking at when she moves in how you will pay her fees.
She has a little bit of cash but otherwise has shares and a property, and there has been some discussion of retaining the family home and the shares to pass onto you and your siblings, but you also know the fees are quite high and cant figure out how to pay them.
You think, maybe I’ll just make the payments for the time being.
In today blog I will discuss why it’s a bad idea to pay for your parents Aged Care fees from your own money, instead of sorting out their assets and paying it from their funds. Clickbait title, so sorry; but this is a mistake I see people make commonly.
Aged Care Fees
Before we jump in, here’s a summary of the different fees paid by an Aged Care Resident and how they contribute to overall care:
Accommodation
Either expressed as a Lump Sum or a Daily Amount, this changes depending on whether you are low means. For most entrants, they pay a Lump Sum RAD, a Daily DAP, or a combination of the two. For low means, the equivalent is RAC and DAC. You can learn more from one of my previous blogs here.
Means-Tested Care Fee (MTCF)
This fee contributes to the cost of care and is calculated based on your parent's income and assets (their financial means). This assessment follows similar rules to the Centrelink Aged Pension, with a few minor changes we will cover in another blog.
You can learn more from one of my previous blogs here.
Basic Daily Fee
This fee covers basic living costs such as meals, cleaning, and laundry. Everyone pays the same amount regardless of their financial position, and it is pegged to 85% of the Single Person Aged Pension amount.
Additional Services Fee
Not all facilities charge this fee, but it is increasingly common. It usually ranges from $1-20 a day (sometimes more) for extra services like higher-quality meals or entertainment options. In my experience, this fee often goes towards providing much better food and comfort for residents and is very worthwhile.
Why it may be a good idea?
There can be few aspects here that make it seem like a good idea to start paying those costs yourself.
Family Attachment to the home (not wanting to sell) and either
Fees are higher if you rent it out
The Home is not in a physical state to be rented out
The Family is not in an emotional state to rent the home out
The Shares have all been held for a long time, and have a huge capital gain. We don't want to pay tax.
Mum has very little liquidity (available cash)
There is disagreement about the best way to go about funding care/restructuring assets and the invoices need paying.
These are all situations I have seen and individually they have merit, but we need to look at it in the broader scope.
Paying your parents Aged Care Fees
This could be made in three different ways
Paying invoices which could include amounts for the MTCF, DAP, DCF and Additional Service fees)
Making Lump Sum Payments onto the RAD to reduce the DAP so there are less fees to pay
Transferring Mum money to be used towards Aged Care fees (or to fix up the home, prepare it for sale/rent).
Each can have merit in a vacuum but have flow on effects.
Cash Flow Implications
In each case, what you are doing is either increasing your parents assets, or stopping them from being decreased.
This has a direct impact on increasing their Means Tested Care Fee (read about that here) no matter what they do with it (including making a lump sum onto the RAD, as it is still an assessable asset).
This can also impact their Centrelink Pension; with more assessable assets for the asset and income test, they may get less pension. Paying money onto the RAD also removes that amount as a way to improve the aged pension, if that was an option down the track.
If you intend to only give it to them in the short term, it is imperative you document it and provide that evidence to Centrelink, as they may not make the connection between the money given to your parent and their consideration back to you at a later date (such as the sale of a house). This can result in the ‘pay back’ being classed as a deprived asset and staying on their assets and liabilities for another 5 years.
Estate Planning Implications
The other, arguably more important but less immediate impacts are around Estate Planning
Once you give the money to your parent, be that in any of the three options above that is their money as far as Centrelink is concerned unless you have a loan agreement.
If that loan agreement isn’t properly documented you may not see that money again if they pass away.
If you pay money onto the RAD, you cannot withdraw it, so if there are difficulties in selling other assets you may not get your money back in a timeframe you expected.
There may be question as to the capacity of your parent to enter a loan agreement, especially if you are their power of attorney as this add potential for conflict of interest.
If you amend the will in order to allow for this, there can be complications around their capacity to amend the will, and any influence you may have had on those changes, undermining the will.
What should you do?
In all situations I have seen, wanting to pay a parents Care fees is always done with the best intentions – but without considering potential risks. My advice is to ensure you see their financial situation as their own and avoid muddying the financial waters.
There are always consequences however, nothing is without cost, for example
Attachment: In selling the your parents home, the family will need to let go of that attachment, but in doing so reduce future infighting and controversy.
Decluttering: Preparing the Family Home for rent is a great chance for decluttering and maintenance, which can increase the value of the property when it is time to sell. Remember that Centrelink don’t consider the Home as an asset for two years, and the MTCF has a fixed value, so any improvements don’t have immediate downsides on Fees or Centrelink Income.
Timing: While it may not be a ‘great time to sell’ an asset, it is worth what it is worth, and if it needs to be sold, that is the situation. I have seen this be a huge point of issue with certain family members having ‘future value’ mindsets on inheritance.
Tax: Selling an asset may trigger a capital gain event, and reduce the overall asset after tax is paid. Selling investments should be looked at on a by case basis, balancing the capital gain tax, any dividends you could reasonably expect and the cost of not selling, however often the fear of paying Capital Gains Tax is greater than the downside. Things to keep in mind include
Assets bough before 20th September 1985 have are considering ‘Pre Capital Gains’ and as such you don’t pay tax on those gains.
Even with a huge gain, your parent may not have any other income so the tax aspect is comparatively low. As an example
Mum bought 1000 shares in CBA when if floated in 1991 and sold them today for $130 per share.
If she is currently on a full pension, with no other taxable income she would about $18,000 in tax, but that leaving $112,000 which if paid into the RAD would reducing fees by $9,385 per year.
Money paid on that RAD would also be exempt from Centrelink assessment if she was not on a Full Aged Pension, so there could be additional Aged Pension benefit, potentially making up for lost dividend income.
In Closing
Often decisions for our loved ones regarding care are made with the best intentions, but due to the complexity of Aged Care rules, as well as Taxation and Estate Planning externalities, these decisions can have unintended consequences.
It is best to keep your parents financial situation siloed from any other family members including your own, to avoid confusion and conflict, especially if you are the Power of Attorney.
If you aren't sure, get advice!
Resources
For more information or to book an assessment visit MyAgedCare: https://www.myagedcare.gov.au/
If you suspect a loved one may be experiencing elder abuse contact the Eldar Abuse Phone Line on 1800 353 374.
If you think they are in immediate Danger Ring 000 or make a non urgent report to Crime Stoppers in your state.
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