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Why it can be a mistake to pay an aged care deposit for mum or dad

Helping out with lump sums often means increased costs elsewhere for your parents so run through the numbers to decide on the best way you can help out Decisions on how to fund residential aged care can be difficult and emotional – particularly how to pay for accommodation. With accommodation costs of up to $2 million, elderly people who do not have enough assets or who are reluctant to sell the cherished family home or other assets may worry about how they can come up with these large amounts of money.

This might be where adult children come to the rescue. One or more of the children may come together and offer to use their own money to pay the costs. But before making this offer, there are some important rules to know.

Low means residents

For someone who is assessed as low-means at entry, the price quoted by the care provider will not apply and, instead, a government-set daily rate is charged. The resident may pay part of the daily rate and the government subsidises the rest. The contribution payable by the resident can be paid as a daily fee or be converted into a lump sum.

Kids should never use their own money to pay the lump sum for a parent classified as low means. If kids want to help, paying the daily fee may be a better choice. This is because the contribution payable by a low-means resident is based on assessable assets and income. If kids pay the lump sum on a parent’s behalf, it is not an assessable asset for Centrelink purposes but will increase assessable assets when calculating aged care fees.

Example:

Dora and Alberto own their home, a $20,000 car and have $140,000 of savings in the bank. Dora enters care as a low-means resident. Assuming a maximum room rate of $58.19 per day, she is only asked to pay the first $14.18 per day and the government pays the rest. Dora can choose to pay $14.18 per day for her room, or she can convert it to a lump sum of $126,237 (at current interest rates of 4.1 per cent per annum) which is refunded to her estate when she passes away. She also needs to pay the basic fee of $52.25 per day towards her living expenses and care. Alberto is worried about how to pay for Dora’s care. He is staying on in the home and is afraid their savings will be quickly depleted.

Their two children come up with a plan to help out. They plan to use their own savings to pay the $126,237 lump sum so Alberto and Dora only have to pay the basic fee which Dora can afford from her age pension. But a nasty surprise is realised when they get their next fee invoice. The money paid by the children increased Dora’s assessable assets and she is now expected to pay the first $44.53 per day of her room cost. The government reduces how much it pays and Dora needs to pay another $30.35 per day towards her room. The children have given up access to a large amount of money and doubled the amount Dora still has to pay for her room. If the children had just paid the $14.18 per day, her accommodation contribution would not have been recalculated.

Standard residents

If a person is not low means at entry, the cost of accommodation is set by the provider and is fixed at entry. If children add their own money to pay a lump sum refundable accommodation deposit, accommodation costs are not increased by the increase in assessable assets but may increase means-tested care fees payable. The savings arising from children paying a lump sum need to be compared against the higher daily fees and the opportunity cost to the children from giving up access to that money.

Example:

Joe is a widower moving into residential care. With $80,000 cash in the bank and a $500,000 home, he will not be low-means and will be asked to pay a means-tested care fee of $2.20 per day as well as the basic fee of $52.25 per day. The care service he has chosen has a room cost of $420,000. The family does not want to sell or rent Joe’s house as they want to be able to use it when they come to visit him and for family holidays. But without using the home, Joe will struggle to pay for his room. His son offers to pay the $420,000 room cost as interest rates on his savings are so low anyway. However, what they did not realise is that this decision increases Joe’s means-tested care fee from $2.20 per day to $20.82 per day – an increase of $6,796 per year. Consider impact on the Estate Solving the problem of how to fund aged care is like putting together a jigsaw puzzle. You need to have all the pieces and know how each piece relates to the other pieces. Seek advice from a financial planner to run the numbers and explain the risks. In addition to the impact on fees that may arise when a child uses their own money to pay the lump sum accommodation costs for a parent, estate planning can cause more problems. When the parent dies, any lump sums paid for accommodation will be refunded, but only to the parent’s estate regardless of who paid the money. Lawyers can help with the impact on the estate and consider whether loan agreements can be put in place to allow the child to recover their contributions from the estate.

Understanding the role of an EXECUTOR in Estate Planning

If you’re in the process of arranging your affairs, it’s important to ensure your assets are protected after you pass away. That includes nominating who will administer your estate.

Many people choose to appoint a close family member as executor of their estate without realising the extent of the burden they are placing on that person.

It can be a time-consuming and complicated role, so agreeing who will take on this responsibility when drafting an estate plan is vital.

“Choosing an executor is one of the most important decisions in the estate planning process, but sometimes the choice is made without fully considering the consequences,” says Anna Hacker, National Manager, Estate Planning at Australian Unity Trustees Legal Services “It’s tempting to pick a family member or close friend, but due thought must be given to whether they have the time, the interest, or even the ability to take on the role.” Ms Hacker said that she is surprised at how casual people can be about choosing an executor.

“I’ve seen situations where people haven’t bothered to tell the person they have nominated to be their executor,” Ms Hacker says. “It comes as a huge – and sometimes unpleasant – surprise when they realise they have been given this duty.

“Some people simply may not want to take it on. It’s far better to find this out before finalising an estate plan, so that a more appropriate executor can be selected.”

What happens if someone doesn’t want to be executor?

If someone is named as executor in a will, but doesn’t want the role, they can renounce and have, for example, a trustee company take over. But the decision needs to be made early, before any action is taken by the nominated executor.

“If the chosen executor starts to act in the role – for instance, contacts banks or credit card companies in the role of executor – they are considered to have ‘intermeddled’,” Ms Hacker says.

“Once people have started to take steps to manage the estate, it becomes extremely difficult for them to then renounce the role and, if they do not want to continue as executor, their only option is to apply to the Court to be removed.

“They may then be financially responsible for any losses or expenses that have occurred as a result of any steps they have already taken and their decision to renounce.”

Why choose a professional executor?

Ms Hacker says that while people often think that a professional executor – such as a trustee company or lawyer – will be expensive, it can be a false economy to choose family or friends.

“Increasingly, family members are likely to ask for a payment for acting as executor, particularly if there is conflict and the estate administration is complex,” she says.

“If it’s likely the estate will end up paying someone to act as executor, it’s worth considering whether it’s better to go with a professional executor from the beginning.

“A key advantage is that an independent executor brings impartiality to the table and will act in the best interests of the will-maker and carry out their wishes.

“If the conflict ends up in court, the costs can quickly sky-rocket, and will usually come out of the estate. Managing this with a professional executor can be a much more cost-effective option.”