Aged care is becoming a bigger and bigger issue as the older baby boomers reach the final stages of their lives.
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But there are so many issues involved that family members end up confused, and often make decisions which could have long-term negative consequences.
There are big decisions to make. At what stage does the person go to aged care? How can they negotiate the entry fees to achieve the best outcome? And how do they manage the interactions between the tax, pension and aged care systems?
One of the major decisions is often whether to sell the family home or keep it. This is further complicated if one partner is capable of living independently, while the other one has no option but to enter aged care.
The challenges in all this were brought to mind when a close friend rang me to ask my advice. She told me her husband's mum owns her own home and has some shares and was needing to move into aged care urgently but wasn't expecting a long stay. The estate planning was up-to-date and the son had power of attorney.
The family were trying to optimise Mum's affairs and the question put to me was whether there was any benefit in Mum signing over the shares and house to the children before she passes. They were trying to make things simple for everybody, and a major concern was whether there would be any effect on age pension.
I confessed straight away that aged care is not my forte, my fields are taxation, superannuation and estate planning.
But I explained to my friend the way capital gains tax works when someone dies. Death does not trigger CGT, it passes the liability to the beneficiary, and is only payable when the beneficially disposes of it.
I told my friend I would pass the aged care question onto Rachel Lane. She is the best person in Australia on aged care and is my co-author in the just-released book Downsizing Made Simple.
Rachel urged the family to seek advice specific to their unique situation before they do anything. She also explained that from a pension and aged care point of view transferring the home and shares now is potentially a financial disaster. Any gift above $10,000 a financial year or $30,000 over a five-year period is considered to be a deprived asset.
Deprived assets are assessable under the assets test and deemed to earn income for five years from the date of the gift. This assessment would be used to calculate mum's age pension entitlement and also in the means testing of her aged care.
While the shares would be a deemed asset whether they were retained or transferred, the real detriment would be in relation to the home. You see, if the home is retained it has a two-year asset test exemption for pension. But if it is sold or gifted it would become a deprived asset.
For aged care means testing mum's home, if retained, would be included in the means test only up to a capped value of $197,735. If it is sold or transferred, the full value would be assessable and it would be deemed to earn income for the next five years.
You can see how easy it is to focus on one element of a financial plan to the detriment of others. A strategy to make the estate simpler could easily have cost this lady $40,000 a year in lost pension and increased aged care costs. Many people think they can't afford to get aged care advice; I think advice is a worthwhile investment.
Q&A
Question
How is a holiday house worth $600,000 assessed for the age pension? We own our home, have shares worth about $30,000 and have $610,000 in super.
Answer
The market value of the holiday home, less any loans outstanding via a mortgage against that home, will be the value used. It's regularly updated by Centrelink. Your current assessable assets are about $250,000 in excess of the cut-off point for a couple which means you would not be eligible for an age pension. My advice is just to spend normally, and if your assets reduce below the cut-off point you could then apply for the age pension. Don't forget you're now eligible for the Commonwealth Seniors Health Card.
Question
How do offset accounts work and is it better to leave money in there and supposedly save interest on your mortgage (while being accessible in case of emergency) and not pay it off your principal?
Answer
With a normal loan the interest is debited each month. If an offset account is attached to the loan the balance of the offset account is taken into account when the interest on the loan is being debited. If the offset account balance equals the loan balance no interest would be payable at all.
They are particularly effective for people who buy their own home but wish to keep it as a rental and buy another home in the future. If they put all their spare money into the offset account the balance of it will grow, and the loan balance should not change. Then, when they buy their dream home they could use the entire offset account balance to help fund that home - the loan remaining then becomes a loan to fund an income producing asset, and the interest can be claimed as a tax deduction.
Question
My husband and I are both in our eighties and decided to take your advice and make a new will to leave money to our sons to avoid the surviving partner losing their pension. The bad news was that because we have all our finances in both names it would automatically go the other partner. What can we do now?
Answer
It would be wise to take steps to move the assets to individual names or as tenants in common. Take advice because there could be capital gains tax and stamp duty issues depending on the asset.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: noel@noelwhittaker.com.au
- This advice is general in nature and readers should seek their own professional advice before making any financial decisions.