The aged care system in Australia has been under scrutiny in recent years. While the focus has been on harrowing stories from inside the system, which hopefully will be addressed, very few people are aware of the often-complex entry process faced by seniors and their families. Here the old principle of “you don’t know what you don’t know” should always be in the minds of seniors along with anyone who wants to offer professional advice or unprofessional opinions.
Many people have never had anything to do with Centrelink - they always do things legally and take pride in having built their assets and feel they have a right to do with them as they want. With that preamble, we’ll introduce you to Jim and Jan. The couple are winding down into retirement and have decided to transfer their farm/business with a value of $4,000,000 to their adult children.
This is legal and prudent succession planning because it sures up the business/farm from an intergenerational perspective, but let’s look forward 2 years. Jan has been diagnosed with fast onset dementia and is now in need of Residential Aged Care.
The cost of a room in the Aged Care Facility that Jim is considering for Jan is $550,000. There are additional care costs in the form of a Basic Daily Care Fee (set by the Federal Government and is applicable to all residents) and a Means Tested Care Fee. The Means Tested Care Fee is based on an assessment of Jim and Jan’s assets and income.
While Jim & Jan are self-funded retirees who have access to $550,000 to pay for Jan’s room, this is the straightforward part of Jan’s Aged Care Costs. Jan’s Means Tested Care Fee is subject to their assets and income, so what could possibly happen when the transfer of assets was completed legally?
As the transfer occurred within the past 5 years, the Centrelink gifting rules now apply.
There are two gifting limits as follows:
A person or a couple can dispose of assets of up to $10,000 each financial year. This $10,000 limit applies to a single person or to the combined amounts gifted by a couple, and;
An additional disposal limit of $30,000 over a five-financial-years rolling period.
As Jan and Jim have gone over this amount, for 5 years after Jim and Jan have given away the asset over the allowable amount ($10,000), Centrelink will:
count the excess in the assets test (in this instance $3,990,000)
apply deeming and include it in Jim and Jan’s income test (deeming rates being 0.25%pa on the first $89,000 and 2.25% per annum for anything over $89,000 for couples)
This applies for the following three financial years as the asset transfer occurred 2 years prior to Jan entering Residential Aged Care. Therefore, Jan’s Means Tested Care Fee will be approximately $244 per day, compared to Jan entering Residential Aged Care 5 years after the transfer of assets, Jan’s MTCF would have been about $73 per day.
From an annual cash flow perspective, this equates to a difference of around $17,300 for the first 3 years that Jan is in care or until Jan meets the MTCF Lifetime Limit. While Jim and Jan are quite comfortable and their cashflow hit is an inconvenience, the transfer of assets at the other end of the scale can have a big impact when it comes to Aged Care Costs.
Take Shirley, who is a single person receiving the Aged Pension. Shirley owns a modest unit, valued at $270,000 with few other assets. Shirley has two adult children, Mark and Robert. Mark has a disability, works part time and lives with Shirley, while Robert is married and has his own family.
Shirley was concerned that Mark would not have a home if anything were to happen to her and organised for the home to be transferred to Mark. Shirley checked whether there would be much impact on her Age Pension Payment, but found it was only a difference of about $2 per fortnight.
One year after transferring her home to Mark, Shirley had a fall and needed to enter Aged Care.
If Shirley had not transferred her home to Mark; Mark would be classified as a “protected person” and the value of Shirley’s home would not have been counted towards the assets test assessment for Aged Care, therefore Shirley would have been a fully supported resident. This means that Shirley would have no Room Cost and no Means Tested Care Fee. Shirley would only be expected to pay the Basic Daily Care Fee as the Commonwealth Government would have subsidised the difference.
As Shirley had already transferred her home to Mark, Centrelink treats the asset as gifting and counts the value of the deprived asset (less the allowable $10,000), in this case $260,000 and deem the asset to be earning interest at deeming rates (0.25% on the first $53,600 and 2.25%pa for anything over this amount for a single person).
This means that Shirley will be an unsupported resident and will be expected to pay the advertised cost of her room, in this case $250,000 as well as the Basic Daily Care Fee and a Means Tested Care Fee of around $5 per day. As Shirley has no assets to support the payment of her Room Cost as a Lump Sum, she will need to pay her Room Cost as a Daily Accommodation Payment (DAP) subject to the maximum permissible interest rate (as set by the Commonwealth Govt.)
Shirley is horrified by the costs, and she now has two options. Firstly, return home where Mark may be able to look after her with the support of Home Care (if she can secure a Home Care Package that caters to her increased needs). Alternatively, stay at the Aged Care Facility and apply for Financial Hardship on an annual basis. There are never any guarantees that Financial Hardship will be granted and if it is granted, which costs the Commonwealth Government will agree to sponsor.
From these scenarios, we can see that each party did everything legally, and with the best of intentions, however neither had anticipated the need for Aged Care, let alone the Centrelink rules. The real impact occurs at the lower level of wealth. In one scenario the asset transfer likely won’t pose any problems, but in the other it has significant ramifications.
While Legal Professionals will accommodate what is legal in relation to the transfer of assets, it is not within their general scope to weigh up the repercussions down the line in relation to Centrelink and Aged Care outcomes.
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.
With thanks to FYG Planners for this article