Aged care: A financial morass

The high cost of aged care.

Summary: Eureka Report looks into the costs of signing contracts with aged care facility operators, including how the family home, gifts and other assets weigh in.  

Key take-out: Individuals must be properly informed before signing contracts to enter aged care facilities as there is a lot on the line. The industry makes money from fees, which includes management fees, service fees, and in some cases, exit fees. Gifting assets may not be overly beneficial, and in many cases, individuals will need to sell the family home to afford initial and ongoing costs.

Recently we wrote about the new rules in aged care, analysing the pros and cons of retaining a family home after moving into aged care.

Continuing to take a look at aged care and funding issues, it’s worth taking a step back to consider more broadly the structure of the system itself; what to expect as well other strategic considerations when it comes to planning for a move to residential aged care.  

Again if not for ourselves immediately it seems there is an increasing likelihood that many of us will be faced with making decisions about living arrangements, or being a part them, for someone close to us at some time or another - especially as life expectancy increases.  

The system is inherently complex and getting intimately acquainted with all the ins and outs from a financial perspective, in advance, is pretty tricky for anyone because the best course of action is usually very much dependant on individual circumstances at the time. But establishing a base understanding of the framework and key decision points will be helpful first step.

Understand the outgoings

An ACAT (Aged Care Assessment Team) assessment, or ACAS in Victoria, will be the first step to determining the individual’s need for care and eligibility for government subsidised services.   

The costs associated with residential aged care can typically be broken down into two categories; accommodation costs and care related costs.  Accommodation costs are set by each facility.  Amounts (assuming full and upfront, under the Refundable Accommodation Deposit or RAD) will vary based on commercial factors but costs in the vicinity of $500,000 are not uncommon.  The RAD is exempt from the assessment of the Age Pension so while there is in initial outlay of capital, a higher RAD can mean an Age Pension uplift as well as avoidance of interest charges otherwise termed Daily Accommodation Payment, or DAP.

Daily care fees can also run into the tens of thousands per annum when taking account of various components.  Each resident will be asked to pay a basic daily care fee (set at 85% the rate of the single age pension and based on current rates about $49 per day) as well as a means tested fee.  The means tested fee is capped at just over $26,000 p.a and $63,000 over one’s lifetime based on current rates.  Additional services fees might also apply for access to extra services, like meal choice for example).   

Residential aged care is not cheap, so establishing realistic expectations (like what might need to happen with the family home for example) may be valuable ahead of what will possibly be an already emotional time.

 

Gifting

When it comes to optimisation of the financial position, gifting assets can benefit an Age Pension assessment as well as means tested care fee, simply by reducing the assessed assets. Limitations do however exist thereby capping, to an extent, what can be gained in this way.  

Under the gifting provisions, an individual can gift up to $10,000 per annum or $30,000 over a rolling five year period before any excess (termed a ‘deprived asset’) will continue to be assessed against the individual for a period of five years.  

First and foremost it's important to ensure that the financial position is not compromised as a result any gifting.  In any event, the limitation can make any improvement to the assessment for either the Age Pension or the means tested fee relatively modest, at least in the short term, but nonetheless can be viable consideration in some instances.  

The home and funding issues

In what can be a stressful period for all involved, the home frequently becomes a point of contention with very often a strong preference to retain it - be those reasons emotionally or financially based.  

The simple reality in many instances is that the value of the home may be needed to secure comfortable accommodation and allow ongoing costs to be met.  Those who are in a position to retain the home can be rewarded to the extent that the home’s value becomes capped at $162,087.20 (as at 20 March 2017) for the purposes of the means tested care fee assessment.  Where the home is sold to fund the RAD or other costs the proceeds essentially become assessed in full impacting the means tested component of the fee.  

A careful assessment of a number of scenarios (for example renting the home or paying the RAD in part) will just about always be necessary to determine the best course of action, specific to the circumstances.  Unfortunately there is no clear cut approach here and competing interests, not the least of which ongoing cost demands, often need to be traded off for the best overall outcome.  It can be quite complex so this is where a professional adviser or aged care specialist comes in.

Transferring the home

A common question relates to the benefit or otherwise of transferring the home to another family member, a child for example, thereby keeping it ‘in the family’ and additionally the assessed assets.  The rules would be fairly clear here with the gifting provisions applying, limiting what can be ‘reallocated’ from an asset perspective within the five-year window.  But separate to that serious consideration would need to be given to what that means in a broader sense - for example to estate, other costs, as well as the individual's own overall financial security.  

When making decisions surrounding aged care a healthy amount of caution should be applied when adopting strategies where maximising government subsidy is the key driver.   Accessing improved support and ensuring there are sufficient liquid assets to meet day to day costs and living needs can be competing factors.  It’s important to strike the appropriate balance between these two drivers.  

Again, aged care and its funding are a highly complex and it’s important to understand your options and seek advice.