Aged care fees and means tests

Summary: Family trusts and means tests; and Downsizer Super Contributions.

Key take-out: Several criteria must be met before a Downsizer Super Contribution can be made.

Question: My mother entered an aged care home this year and had an assets and income test to determine the means tested fee she would need to pay. We were astounded that all of the assets in our Family Trust have been included as her assets. The daily fee she is being asked to pay is based on the total value of the trust, rather than her own assets and a fair and reasonable portion of the trust funds.

This seems extremely unfair as my father set up the trust to benefit his children and grandchildren and left my mother with a very generous indexed pension so she does not need to rely on the trust. He worked hard and provided for everyone and now the government is taking as much of it away as they can. Aged people who do not have any assets are not required to pay anything for the same care.

What do you think and is there anything we can do? If my family had several members needing aged care simultaneously, would they all be asked to pay a fee based on the whole of the trust funds?

Answer: Several years ago, I had a client who was in the same situation. In this case, my client’s father had set up a discretionary family trust which had considerable investment assets. After his father died, my client took over managing the investment portfolio, and also looked after the administration of the family trust.

My client’s mother had her family home, some share investments, and several large term deposits. She was also a director of the trustee company, and had been a joint appointor of the family trust. My client had asked me to see if there was a way his mother could qualify for some small amount of age pension so she could also get the pensioner health card.

When an individual or couple is deemed to be in control of a family trust, the value of the trust assets will be counted by Centrelink as an asset of the individual or couple.

You have not provided details of how the family trust was set up by your father, but I suspect that your mother is a joint trustee or a director of the trustee company, and also that she is shown as an appointor of the trust.

Under trust law, the day-to-day management of a trust is the responsibility of the trustee. As the appointor of a trust has the power to remove and appoint trustees of a discretionary trust, they have the real power and control over a trust.

In my client’s situation, we had legal documents prepared to resign his mother as a director of the trustee company, subsequently appointing my client and his brother as two new directors. The critical legal documentation involved removing his mother as an appointor of the trust, with my client and his brother becoming joint appointors after her removal.

After taking all of these steps and preparing the relevant documentation, my client’s mother no longer had the full value of the family trust counted as an asset. Instead, only the value of a loan account owed to her by the trust was counted as an asset.

The key to fixing the problem for my client was using a lawyer who understood trust law, and was able to prepare the documentation that satisfied Centrelink. Hopefully, the accountant of the family trust set up by your father should be able to assist you. If they can’t, you should look for another one.

Question: I have just turned 89 and my wife is 86 and we are solely reliant on the age pension. We are now in the process of selling our home and downsizing into a unit, which should leave is with about $400,000. At our ages is there any benefit in rolling this money into a managed pension account where we can earn tax-free income on top of the age pension?

Does having $400,000 disqualify us from receiving the full age pension under the assets test, or is it better to reduce this amount to a lower level? Also, would an industry fund be a good option for a managed pension account to generate additional income?

Answer: Whether you lose your age pension or not will depend on the total value of your assets as currently counted by Centrelink.

To receive the full age pension, a couple must have combined total assets of below $387,500. A couple loses access to the age pension entirely once the total value of their assets exceeds $848,000.

The problem is this: if after selling your home, you are left with $400,000 in cash, the current total value of assets counted by Centrelink may exceed $848,000. In that case, there is not much you can do reduce the value of your assets.

A couple can only give away up to $10,000 a year, and a maximum of $30,000 over a five-year period. One of the few ways in which you could spend your money and reduce the value of the assets counted by Centrelink would be to make improvements to your new unit. You have to be careful, however, not to over-capitalise the unit.

Once you have used the excess cash from your sale to make improvements to the unit or to go on a dream holiday you have never been able to afford, you may consider making a Downsizer Super Contribution (DSC) from the excess funds, and starting an account-based pension.

The ability to make a DSC is dependent upon the following seven conditions:

1. Being aged 65 years or older at the time the contribution is made;
2. The contribution must be in respect of the proceeds of the sale of a qualifying dwelling in Australia;
3. A 10-year ownership condition must be met;
4. Any gain or loss on the disposal of the dwelling must have qualified (or would have qualified) for the main residence CGT exemption in whole or in part;
5. The contribution must be made within 90 days of the disposal of the dwelling, or such longer time as allowed by the Commissioner;
6. The superannuation provider is advised that the contribution is a DSC on the approved form at the time the contribution is made; and
7. No DSCs could have been made in relation to an earlier disposal of a main residence.

You and your wife meet the first condition, and should meet the other conditions. Given the complexities of the Centrelink asset rules and the new DSC, you should seek professional advice before taking any action.

If you have a question for Max Newnham please email it directly to max@taxbiz.com.au