INTERGENERATIONAL FINANCIAL PLANNING
Chapter 2 - The family home and residential aged care
TO KEEP OR NOT TO KEEP THE FAMILY HOME
The family home is a special case in retirement and aged care planning.
Often, we take a different view of the family home than many financial advisers. Basically, we recognise family homes as the cornerstone of most people’s wealth. So, our starting point is that the family home should usually be retained whenever possible.
That said, no two clients are the same. Each situation needs to be taken on its merits. The following sections discuss the interplay of the family home and aged care planning and talk to general themes that need to be addressed when you are planning for aged care.
BENEFITS OF RETAINING THE FAMILY HOME
There are many potential benefits of retaining a family home when moving into residential aged care. These include:
Reducing your asset base for calculating the means tested care fee payable;
Retaining an asset from an asset class that has traditionally done as well or better than any other asset class;
Retaining the ability to borrow against the home;
Retaining the ability to derive rent from the home;
Retaining exposure to capital growth in cases of relatively long stays in residential care;
Retaining wealth in a CGT-free investment type;
The personal wellbeing benefits from knowing that the family home has been retained; and
Potential compatibility with your inheritors’ plans.
BENEFITS OF SELLING THE FAMILY HOME
There are also potential benefits of selling a family home when moving into aged care. These include:
Being able to pay cash for the Refundable Accommodation Deposit (‘RAD’) required by most homeowners when entering an aged care facility;
Achieving an effective rate of return of 5.7% when paying the RAD as a lump sum;
Avoiding the need for complicated financial management, such as the use of reverse mortgages or the management of a tenancy;
Freeing up cash flow to be used for other lifestyle choices, such as paying for extras in the aged care facility; and
Simplifying affairs, especially in cases where there are multiple people affected by your decision.
KEY FACTORS TO CONSIDER WHEN DECIDING
In determining what to do with your family home, there are a number of particular factors that should influence the decision. These are discussed in the following sections.
The Home is usually the major asset
For many, if not most, people, the family home is typically the major asset that they own. In cases where a person has retired with substantial super or other non-home wealth, these benefits have often been drawn down by the time an aged care facility looms.
For example, according to the Australian Institute of Health and Wellbeing, only 8.7% of residents of aged care facilities are self-funded retirees. The overwhelming majority claim either a DVA or a Centrelink pension. This tells us that they have relatively few assets outside the family home (the family home is exempt from the assets test for these benefits).
Accordingly, the decision regarding the family home will often be the most significant decision that you are likely to make (or have made on your behalf).
Residents contemplating residential aged care are necessarily frail. Accordingly, it is common for at least one other person to be involved in a resident’s financial management.
Often, this goes well. But the reliance on someone else can raise issues to do with propriety. Put simply, it is not uncommon for an older person’s children or grandchildren to start to see their parent or grandparent’s family home as their own once their older relative enters an aged care facility.
Interestingly, the Office of the Public Advocate in South Australia has seen fit to remind people that they simply do not have a right to an inheritance while their loved one is still living.
For us as advisers, the older person’s reliance on someone else can raise some ethical issues. As professionals, we must put our client’s best interests first. However, the ‘best interests’ of the elderly client are not necessarily the same as the ‘best interests’ of the eventual beneficiaries of the clients’ estate.
The law, and our own ethics, require us to always act in the best interests of our client – and no one else. If you are an older person, you can be sure that our advice to you will always represent our opinion about what is the best thing for you to do.
Powers of attorney and trustees
Ideally, where frailty has become an issue, an older person will have granted one or more powers of attorney to some other person to act on their behalf. This will include making decisions regarding the family home. The power of attorney legally empowers the other person to make decisions on behalf of the older person.
The key thing for the attorney to remember is that they have a fiduciary duty to act in the best interests of the older person.This means that the older person’s interests must take precedence over any other person’s interests.
The length of stay in an aged care facility
One of the most difficult factors in deciding whether to retain a family home is the fact that the length of stay in an aged care facility is unpredictable.
According to the Australian Institute of Health and Wellbeing, the average length of stay in an aged are facility, as of 2011, was around 145 weeks, or just short of three years. Stays were shorter than this for men and longer for women (and 70% of residents are women).
145 weeks is simply an average. There is substantial variation around that number. 27.1% of people stayed for less than two years, while 20.5% of residents stayed for more than five years (this figure was slightly higher in major cities).
So, relatively long stays in aged care facilities are common: 1 in 5 people who enter residential aged care will still be there 5 years later. The system takes this fact into account in various ways. One is the lifetime cap on the means tested care fee payable by residents. This fee is capped at around $62,000 (this figure does increase with inflation) for life. Another is the fact that the Refundable Accommodation Deposit does not increase once a resident has moved into a facility.
Residents using debt, such as a reverse mortgage, to pay some or all of a DAP may find that the amount of debt starts to approach the limits on the debt as the years pass. Simple investment analysis tells us that the net equity in the home should not be affected, as long as the growth rate on the home keeps track with long-term averages. But growth can be lumpy, and so a plan for what happens if the debt starts to approach its limit makes sense.
The best plan, of course, is to minimise the amount borrowed wherever possible.
The presence of a ‘protected person’
A protected person is someone whose continued presence in a home after the owner (or co-owner) moves into residential care has the effect of exempting the home from the assets tests that apply to aged care. There are four categories of protected person. These are:
The resident’s spouse or partner;
A dependent child or student;
A residential carer of at least two years standing and who is entitled to a Centrelink benefit on the day the resident moves into the aged care facility; or
A close relative who has lived with the resident for at least five years and who is entitled to a Centrelink benefit on the day the resident moves into the aged care facility.
The presence of a protected person means that the value of the family home is not counted towards the assets test for either the means tested care fee or the accommodation fees.
In most cases, then, where a protected person remains in the family home, there is an economic rationale for keeping the family home. Which is kind of nice, because the protected person still needs somewhere to live!
The absence of a protected person
Where there is no protected person, the decision as to whether to keep the family home becomes just that: a decision. The client and their adviser need then to decide whether and how to keep or dispose of the family home.
Capital gains tax
One issue that is usually worth keeping in mind is that the principal place of residence exemption that applies to a family home continues for up to six years after a person leaves the home, as long as they do not claim another principal place of residence. (the extension is indefinite if the home is not rented out).
In addition, where a principal place of residence forms part of a deceased estate, then there is a two year period following the death of the owner during which the CGT exemption continues to apply.
What this means is that the CGT-free status of a family home can continue for up to six years following the owner’s entry into an aged care facility.
Alternative uses of the proceeds of any sale of the family home need to be weighed against this feature of the family home.