The best aged-care solutions strike the right balance between the financial and quality-of-life outcomes for all parties. Mark Story explains.
The decision to shoot at the enemy is never questioned in the heat of battle, especially when you’re confronted with the real prospect of either “kill or be killed”. As tough as it may have been, the decision to sell the family home to fund his pending move into an aged-care facility was equally uncomplicated for decorated, Melbourne-based World War II veteran Reg Sullivan (not his real name), aged 91.
Reg had lived on his own for seven years, after his wife of 54 years, Patsy, passed on. Reg was still able to get around without too much assistance; but it became clear that his deteriorating health would make maintaining a family home increasingly demanding.
While he had four daughters to help, they had families of their own to look after. So the family consensus was that “low-care” support within an aged-care facility would meet Reg’s daily needs – such as food and access to health care – while preserving as much of his independence as possible.
Tough love
Based on the family’s choice of aged care for Reg, the accommodation bond needed to fund his entry was $400,000. As a result, Reg and his four daughters mutually agreed that the family home at Blackburn, in Melbourne’s leafy eastern suburbs, needed to go under the hammer.
“As much as Dad wanted to preserve the family home as a future legacy for his daughters, our more pressing priority was freeing up the capital he required to live on,” says Marcia, one of two daughters given power of attorney over Reg’s financial affairs.
“And with Melbourne property values having risen 14 per cent in 2010, now seemed to be a good time to maximise returns.”
Reg – a former school teacher who’d cashed in his super at retirement to pay off his mortgage and other debts – had little in the way of personal investments, and as such had no former dealings with financial advisers. In addition to the family home, valued at $630,000, Reg had $106,000 invested in cash, and received a service pension of $708.20 a fortnight from the Department of Veterans’ Affairs (DVA). He also qualified for a DVA Gold Card, which assisted with ongoing medical costs.
Call to arms
Earlier this year, when it became clear that Reg urgently needed to move into permanent residential aged care, Marcia and her sister Gloria – the other daughter granted power of attorney – approached local professional planner Val Nigol, on the recommendation of a friend, looking for aged-care advice.
To expedite proceedings, Nigol’s initial recommendation was that $85,000 of Reg’s existing savings be used to pay a deposit to the aged-care home in order to secure Reg’s place.
While facilitating Reg’s immediate entry into low-level aged care, it also meant there was sufficient time to prepare his house for auction to maximise the potential sale price.
“The plan was to pay the balance of the $400,000 accommodation bond, plus any accrued interest at 8.92 per cent (a government-prescribed rate), once Reg’s home was finally sold,” says Nigol.
With one eye on their future inheritance, some family members were more interested in an aged-care solution that maximised financial outcomes. And from Nigol’s perspective, renting out the family home, combined with a periodic bond payments plan, may have delivered a better financial outcome than the immediate sale of Reg’s home.
However, during his initial meeting with Marcia and Gloria, it became clear to Nigol that the sale of the family home wasn’t up for debate.
“We felt like we’d been dropped in at the deep end, and weren’t at all comfortable about discharging our responsibilities as power of attorney,” admits Marcia.
“Given the potential for disagreement between us four [sisters], we felt impelled to bring in an independent third party like Val for advice.”
Value propositions
Having been charged with this brief, and advised that the aged-care provider’s accommodation bonds were not negotiable, Nigol proceeded to identify three aged-care solutions, based on their ability to: pay the $400,000 accommodation bond, fund ongoing annual fees, invest surplus funds in a tax-efficient manner, and provide Reg with sufficient cashflow for a comfortable lifestyle – while maximising his entitlement to a veteran’s pension.
Admittedly, selling Reg’s home and fully paying off the accommodation bond – to eliminate the high rate of interest accruing on the unpaid bond – was a given. But how the balance of funds was to be invested after the bond was fully paid had significant implications, both for his service pension and the fees payable to the aged-care facility.
“Restructuring Reg’s assets could effectively reduce his aged-care…fees by reducing the value of Reg’s assets – which would be assessed by the DVA when they determine the level of fees that he’s required to pay,” says Nigol.
Three potential aged-care strategies proposed by Nigol included:
A) Sell Reg’s home, pay the bond in full and hold $315,000 in cash;
B) Sell Reg’s home, purchase a 10-year annuity for $290,000, and add $25,000 to Reg’s cash reserves; or
C) Sell Reg’s home, invest $200,000 in an investment bond held in a family trust, and hold $115,000 from the sale of the home as cash reserves, along with the current balance of $21,000.
