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Aged Care facilities: strategies for effective funding and a successful transition…(2 of 4)

This posting – as with the previous post; and the following posts in this series – are provided to assist families with the decision-making process when it becomes apparent/ obvious that a senior member of the family is going to require accommodation in an aged care facility: whether that be in a ‘low level care’, ‘high level care’ or extended services facility. In this post we look at some strategies to ensure the most appropriate financial outcome is attained for the transition.

Aged care strategies – the value of advice

As revealed in our first posting in this series aged care fees can be very expensive – which is why advance planning is very important.  Outlined below are a few of the available strategies that can be employed to help lower the ‘accommodation bond/charge’ payable, the ‘income tested fee’ or both.

1. Strategies to reduce accommodation bond/charge

NOTE: The accommodation bond/charge is determined taking into account the resident’s assets at the time of entry2.

1.  Gifting assets

By gifting an asset, a resident can reduce the effect of the assets test.  Up to $10,000 per financial year can be gifted, or $30,000 over a five-year rolling period.

Any amount exceeding the allowable limit will be treated as a financial asset for five years from the date of disposal and therefore, subject to the deeming rules.

2.  Purchasing a funeral bond3

From 1 July 2009, funeral bonds up to $10,750 are exempt from the assets and income tests. This is a good strategy for those people who may potentially be charged with a higher accommodation bond or charge due to the value of their assessable assets.

3.  Renovating the family home

For aged care purposes, the family home is exempt under the assets test if a spouse is still living there regardless of its value, provided it’s not on more than two hectares.

If your assets are over the aged care asset test threshold (currently $37,500) and your home needs renovations, renovating prior to moving into an aged care facility will help reduce the value of your assessable asset.

4.  Special Disability Trusts4

In relevant cases, a ‘Special Disability Trust’ may be set up for the person moving into an aged care facility.  What this means for the principal beneficiary is that all assessable trust assets up to the concessional asset value limit of $551,750 (current as at 1 July 2010) are exempt from the social security/aged care assets test. Furthermore, all income earned by the trust is exempt under the income test.

There are, however, strict requirements when setting up a ‘Special Disability Trust’.  One requirement is that, the ‘principal beneficiary’ must meet the definition of a ‘severely disabled’ person for social security purposes.  ‘Severe dementia’ may meet the ‘severely disabled’ definition.  It’s important to consult Centrelink/DVA about this matter.  Also, another requirement is that, the principal beneficiary cannot contribute into his/her own ‘Special Disability Trust’, however a bequest or a superannuation death benefit received within two years can be contributed by the principal beneficiary. 

2. Strategies to reduce daily income tested fee

The daily income tested fee is assessed in exactly the same way as the social security/DVA income test.

1.  Setting up a family trust and buying an insurance bond3

One way of minimising income to reduce the income tested fee is to set up a trust4, gift money to the trust and then use the money to purchase an insurance bond.  The gifting rules will not apply if the donor is the sole attributable stakeholder (controller) of the trust.

When a trust is set up, only the actual income received by the trust is assessed for social security/ DVA/ aged care purposes.  As insurance bonds don’t distribute income, there is no income generated by the trust, and therefore no assessable income for the client.

When contemplating using this strategy, the following need to be considered:

  • insurance bonds are taxed internally based on a 30% rate, which may be higher than the client’s marginal tax rate even after allowing for credits and offsets (which can see the effective rate down to the low-20’s)
  • the cost of setting up the trust structure and on-going accountancy fees have to be taken into account
  • the amount of money that can be effectively placed in the bond/trust structure is limited by the need for sufficient cash flow to pay for ongoing aged care fees and discretionary expenses, and
  • the income tested fee qualifies for the ‘net medical expense tax offset (NMETO). Many clients who may benefit from the tax offset may have their taxable income reduced as a result of the ‘fee reduction strategy’.

2.  Purchasing an annuity3

Annuities with a term of six years or more (or a term equivalent to the annuitant’s life expectancy) are beneficially treated under the income test, compared to financial investments that are subject to deeming.  This is because of the calculation of a deductible amount which reduces the assessable income under the income test.

3.  Special Disability Trust

Setting up a ‘Special Disability Trust’ can also help reduce the ‘income tested fee’ as all income from a ‘Special Disability Trust’ is exempt for the purpose of both social security and income tested fee. (Refer notes in Item 4 in the above strategy in relation to circumstances that are relevant to such a Trust.)

4.  Gifting assets

As discussed in the strategy (at Item 1) above, gifting an asset within the allowable limit can reduce the effect of both the income and assets test.

5.  Purchasing land or a holiday home as an investment

This may be an option, especially if the land or holiday home isn’t earning any income.  Although the market value is included under the assets test, no income is assessed if not rented out.

Financial Planners can help families create opportunities when interacting with the aged care industry

Families will benefit from consulting with financial planners5/advisers who have experience in this area of substantial emotional and financial anxiety.  Financial planners can ensure that helpful advice is made available to elderly parents, relatives, friends and even their extended community. There are many real life cases of clients benefiting from a consultation and engagement of a financial planner experienced in this area of advice.

1Posting 2 in a series of 4 Blogs about preparation for the transition from home to an aged care facility for accommodation and care needs for the aging/ aged. 

2It has been suggested that a subsequent evaluation can be made where circumstances change post-entry to the facility: enquiry should be made with the facility at time of entry to confirm whether this will be available. 

3Funeral bonds, Insurance bonds and Annuities are offered by a number of institutions: an experienced financial planner will be able to assist with selection of a fund suitable for your needs. 

4Special Disability Trusts, as with other trusts discussed in this posting, should be established in the broader context of Estate Planning: an area that will require the services of a legal adviser, but in which a financial planner with experience in the field will provide additional value.

5Continuum Financial Planners Pty Ltd has experienced planners available to assist families in making the most appropriate decision in your circumstances.

Adapted from articles written by Cecile Apolinario, ThreeSixty; and Pinnacle Financial Services Academy – under the title ‘Aged Care Strategies’ in the April and May, 2010 issues of a financial planning industry journal.
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