There may be a number of situations in the transition to residential aged care that can present a conflict of interest with the people you are dealing with. To be confident in getting the right outcome it is worth knowing how these conflicts could present themselves.
Should you keep your funds in an investment portfolio or hand over your money to the aged care provider?
Most financial advisors need assets invested to get paid (although not all). Selling assets to raise funds for the payment of a RAD (Refundable Accommodation Payment), may not be that good for the financial adviser, as assets that they may have been charging fees to manage for some years will now be in the hands of an aged care provider.
By using investment assets to pay a RAD, the resident may get a higher Aged Pension as funds used to pay a RAD are exempt from Centrelink testing.
The alternative to paying a RAD is a DAP(Daily Accommodation Payment ). This is like an interest payment, and is at a rate set by the government - currently 6.69%.
The reasons not to use financial assets to pay a RAD will most likely be based upon keeping assets liquid to fund care costs. Make sure financial assets that are kept in the hands of the financial advisor are there for the right reason - it may be costing you interest and potentially a higher Aged Pension payment.
Reverse mortgage - a drip may be better than a waterfall
Much is written about reverse mortgages (see ASIC’s Moneysmart website). In aged care planning, a reverse mortgage can work very well in some situations - however they are quite specific. Make sure you see and understand the numbers and the reasons.
Lenders may want to offer you a higher loan. The bigger the loan, the bigger the fee potential. However for reverse mortgages the best outcomes are often where the loan is drip fed to satisfy expenses as opposed to being drawn down in a lump sum.
For example, using financial assets to pay a RAD will reduce financial asset levels and therefore potentially increase the Centrelink Aged Pension. Meanwhile, a house and the rent received can be excluded from Centrelink tests. A reverse mortgage could help to satisfy care costs as they fall due, while allowing the resident to keep their house and rent it out. This may work well for the resident - but you will want to understand the numbers.
What is best for the resident vs the aged care provider
The investment community is very interested in aged care right now. Recently listed aged care provider Japara had a strong share market debut. A big part of the story of this success is based on the potential for the provider to collect a lot more in RADs.
The story goes something like this: the government changes mean Aged Care providers can now collect a lot more money from residents as a Refundable Accommodation Payment (RAD). For the Aged Care provider, a RAD is a chunk of money that allows them to reduce debt. The provider is effectively borrowing from resident and paying no interest. This is a great outcome for the facility if they may have previously had costly loans with the banks. They can now borrow from the resident for free. This saves them a lot of money.
Alternatively, some providers may not have the need for RADs - in fact the payment of a RAD may not be that much use to them if they will just put the money on deposit at a bank for measly rates. These aged care providers may have no debt at all. If the resident decides to pay the accommodation costs as a Daily Accommodation Payment (DAP), they will be paying at an interest rate set by the government - currently 6.69%. These providers will not get 6.69% by placing these funds in the bank. These providers may prefer the resident to be paying them 6.69% instead!
This may result in the resident being told of a preference for a RAD or DAP. The fact is that the resident has the choice. Some providers will try to make an offer that sees both the resident and the provider get what they want. Alternatively, the provider may show preference for a resident who is likely to pay in a way that works best for them. How do they tell? Frankly, this balance is yet to establish itself. The aged care providers, and their investors, are watching closely.
It may be time to manage capital gains
When mum or dad go into care a lot of things change. One thing that could change is the overall income position. With the investment pool potentially diminished as a RAD is paid, taxable income may be low. Further, aged care costs are partially deductible via the net medical expenses offset (which was dismantled for all except aged care expenses until July 2019). This can potentially make for a good opportunity to realise capital gains, as taxable income is low.
Why do this? Consideration of intergenerational wealth issues should come into play here. If assets are to be passed onto the next generation and then simply sold down to pay down mortgages or for other uses, it may make more sense to sell the assets now, while the resident has a low tax rate. And - there is also the case for reducing risk to manage aged care costs as a risky investment portfolio may not be the right way to keep assets in reserve to fund aged care costs.
This issues is relevant when considering the reasons for keeping an investment portfolio rolling on when mum or dad is in care. Does it still make sense?
Annuities, bonds & trusts - complexity can be expensive.
Make no mistake, there can be a good case for a range of structures at this stage. Having said this - if the benefit is skinny - look closely at all the fees, margins and commissions before you make judgement on whose interests are served.
There is a good case for expecting average amount of time in residential aged care to reduce over time as governments make it easier for Australians to stay at home longer, and the cost of residential aged care rises.
Make a trade off around the complexity for the time these more complex structures are around for. They may be expensive and difficult to set up as well as dismantle, and only for marginal benefit.
Your timing vs the timing of your advisor
Many advisers work in different ways. In many cases, a financial adviser will be able to help people in a broad variety of financial situations because they have a centralised group that do the heavy lifting when it comes to detailed financial planning - generally called a paraplanning team. This means the financial adviser doesn't need to be an expert.
The way this works is that the advisor asks a a whole bunch of questions, then sends the information off, to come back a while later with all the answers - solved by the experts somewhere else.
This does not work that well for families coming to terms with aged care costs, because things happen fast, and things change a lot. Families are looking at facilities, finding more information, getting feedback on affordability and all the way, modifying plans. By the time your advisor comes back in 2-4 weeks with a plan, things may have changed a lot.
Make sure your advisor has the expertise to fit in with this fluid situation. The way they do things may suit them. Does it suit you?
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