The aged care system is frighteningly complex, and it gets even worse when you combine it with the challenges of estate planning.
A reader, who I will call Jack, told me an older brother, Jim, was in care, and due to his declining mental facilities had given Jack an enduring power of attorney some time ago.
Jack is obviously a very decent fellow and was well aware of the duties of an attorney, which include attempting to achieve the best outcome for the donor, and doing nothing to benefit himself.
A few months ago, a term deposit of $98,000 matured. In an endeavour to achieve a better return for Jim to help pay his daily accommodation fee of $27 a day, Jack invested the $98,000 into some blue-chip shares.
They performed so well that they are now worth $137,000, but Jack has found to his horror that his brother's daily care fee increased to $46 a day.
Jack had two questions for me: had he breached his duties as Jim's attorney by taking an action which led to a poor outcome for Jim; and was there anything he could do to improve the situation?
To answer the first question, I consulted lawyer Brian Herd, an expert in estate planning, who assured me that Jack's conduct as attorney had not breached his duties.
Those duties should be measured against what was in the best interests of his brother. The choice is invidious - invest with a potential high rate of return and suffer the unintended consequences of increase in aged care fees, or invest in something conservative like the good old term deposit which would not have the same consequence.
Jack's best protection would have been to obtain financial advice before deciding on what to do (that way he could protect his backside and blame the financial adviser if things went wrong).
In the end, however, what he did was probably reasonable in the circumstances, and it was unfortunate that the outcome was both unexpected and undesirable. Keep in mind too, that he has increased his brother's assets by $39,000.
For the second question, I spoke to Aged Care Guru's Rachel Lane about the situation.
Rachel explained that Jim had moved into aged care as a low means resident, which means changes to his assets or income affect his accommodation contribution (if his assets go up so does his contribution; and if they go down, his contribution goes down).
As a low means resident his contribution under the asset test is calculated at 17.5 per cent on assets between $51,000 and $173,000.
Put simply, the $39,000 increase in the value of Jim's assets is costing him an extra $6825 a year in accommodation contribution - it's a hefty penalty and requires a return on assets that simply can't be generated.
But on the other side of that coin, good financial planning strategies to reduce his assets can make aged care more affordable.
Jack now has a dilemma. He could leave the situation as is, and rely on the franked dividends from the shares to pay the daily charge (but he would need to earn around 12 per cent on $137,000) and he faces a 17.5 per cent penalty on any increase in value.
A better solution may be to sell the shares and return the proceeds to the bank. Jack could arrange a prepaid funeral for Jim, say $7000-worth, and give away $10,000 to a recipient that Jim would be happy with.
Another option would be to purchase a particular type of annuity (broadly referred to as an Aged Care Annuity), which due to its Centrelink means tests assessment has the potential to increase his age pension and reduce his aged care costs.
Although the benefit of such a move is likely to be modest, it is worth considering.
Unfortunately, there is no silver bullet; Jack should be taking advice from a financial adviser who specialises in retirement living and aged care.
Noel answers your money questions
I am 46, my wife is 45 and we have three young children. Our combined annual net salary is $270,000, and passive annual net income from rents and share dividends is $37,000 a year.
We own our home outright, worth $1,800,000, plus two investment properties worth a total of $1.2 million. We have $290,000 in term deposits, $50,000 in shares, and $390,000 in superannuation. We have no debt.
We save $11,000 a month, and were planning to use $5000 a month to buy more shares, plus $6000 a month as repayments on a third investment property - using $200,000 as a deposit. Our aim is to have a passive net income of $60,000 outside super by the time we're 50. I have read recently about the share market and housing being over valued so wonder if I should delay purchasing shares or another property until the market cools a little?
It is well accepted that nobody can consistently and accurately forecast the direction of markets. You may well have 50 years of investing ahead of you - in the light of the success you have had to date I suggest you keep on doing what you are doing and grab any bargains that come along when you see them.
I am a 34-year-old tradesman with my own business. My wife and I have a house mortgage of $310,000 with an interest rate of 2.5 per cent over 30 years, but with $160,000 in the home loan account to offset half. I also have a private loan from a family member for a workshop of $160,000 at an interest rate of 4.5 per cent over 10 years. All the interest on the workshop can be claimed on tax. Would I be better off paying off the workshop or keep chipping away at the home loan?
The best strategy would be to attack your non-deductible debt first. Therefore, I suggest you repay the business loan at the slowest rate possible, and focus all your energies into getting rid of the non-tax-deductible home loan. When the home loan is paid off you could re-examine your options.
Recently in this column you mentioned an elderly couple with a self-managed superannuation fund and said they could give any amount to their children they wished as they were not receiving an age pension and therefore would not be subject to deeming.
My wife and I have an SMSF and three adult independent children. We are not on a pension
We have an accountant do the tax return etc and a financial adviser - we only have shares and managed funds. I have always understood that the sole purpose test was a major issue when maintaining a SMSF and that such assets could only be used to fund retirement living. I would have thought this precluded any gifts coming from the super fund. Could you please clarify?
You are correct in as much as a superannuation fund cannot make gifts or loans. However, you are free to withdraw funds from your superannuation fund once you have reached your preservation age, and once those funds are in your bank account you could do with them what you wish. This may be for gifts, travelling, home renovation or any other purpose.
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Recently you said that if a property was a principal residence for some of the time of ownership, one is eligible to contribute up to $300,000 into super.
At the end of 2019, my super fund told me that I was ineligible to contribute some of the money from my proposed house sale to super because it was not my current principal place of residence - there was no discussion about it having been my principal residence from 2004 until 2012. Is it possible that the rules have changed since then and I am following incorrect advice?
I sold the property in question in 2020 and am preparing to pay CGT on it this financial year. However, the money is sitting in my bank account when it seems that I might in fact be able to put it into super. Could you please clarify?
The rules have not changed and sadly there is no simple answer. You could lodge a complaint against the advice provided by the super fund, but this may be a drawn-out process and would not guarantee that you could make the contribution now as a downsizer contribution.
You could, through your tax adviser, apply to the ATO for an 'extension of time' to make the downsizer contribution and lodge the required form, on the basis of the incorrect advice received from the super fund. Again, there is no guarantee here.
The third option may be more palatable. If the government's proposed change to remove the work test for non-concessional contributions from July 1, 2022 is passed, then you can make a non-concessional contribution of up to $330,000 from July 1, 2022, if aged between 67 and 75.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. firstname.lastname@example.org.