AGED CARE ADVICE | To pay or not to pay the RAD
I thought I would write this article as it is probably the most discussed item on the agenda when a family approaches us for aged care advice. It is also a decision that requires careful consideration and possibly referral to an accredited aged care adviser. Hopefully it will make you more aware of, or be able to identify financial issues earlier in the process of providing care.
The main concern we encounter from a family is how to pay the advertised room rate or RAD (refundable accommodation deposit) to the nursing home they choose. If they are required to pay a full or part RAD the following considerations need to take place:
What investments or assets do we need to sell: bank savings, shares or property?
Should we just pay the interest on the unpaid RAD and not pay a lump sum at all?
What about tax if we sell investments?
How could paying the nursing home’s RAD affect what I wrote in my will?
What’s the impact on my/our age pension? Will I get more or less?
As you can see there are multiple considerations to make. It is not as simple as just telling a family they should pay as much of the RAD as possible, although in many cases it is a simple mathematic equation i.e. are they earning more than 5.73%p.a. on their current investments? Yet, sometimes that’s not even important to the person needing care.
Here’s a real life example:
Mrs. Jones is in fulltime care already. She has recently received the proceeds from the sale of her retirement unit. She is an aged pensioner and has not paid any RAD yet. Her son did seek advice on how to best fund mum’s aged care but when the funds became available she refused to pay any RAD. Their financial adviser visited the mother to discuss, and as it turned out her main concern was what happens to the RAD if the nursing home goes bust. She wasn’t concerned about her ongoing costs etc – it was all about the security of the RAD. Once she was made aware that the RAD was government guaranteed (excerpt from “myagedcare” website provided) she agreed to pay a lump sum off the RAD which lowered her ongoing annual costs by up to $11,000 p.a.
SELLING ASSETS TO PAY THE RAD
Should the person requiring care sell a portfolio of dividend earning shares to pay a RAD? Perhaps not, if the dividends after tax are earning say 8%p.a. plus capital growth, not to mention a possible capital gains tax event if there is an underlying profit. An 8% yield is better than 5.73% (DAP). What if those shares were bequeathed in the will to a family member and you’ve just told the family to sell them to pay the RAD? That brings us to the next concern:-
RAD AND THE ESTATE
At death the RAD goes back to the estate and is divvied up as per the will, unless there is a specific instruction in the will related to the return of a nursing home RAD. If you instruct the person or suggest they should sell investments to pay the RAD and that contradicts with their will, it can obviously cause problems.
AGED PENSION AND THE RAD
If the person or couples are in receipt of a part pension, paying a lump sum towards the RAD will generally result in an increased pension. This is important as the pension is used to help fund their aged care costs. If the person or couples are in receipt of the full pension already, there is no pension increase. Their main benefit in that case is the earning rate from their investments versus the DAP of 5.73%p.a.
Should the person requiring care pay a RAD if their health looks very unstable?
Consider the following case:
Allan has to move into care. The doctors at hospital say he can’t go home and he may only last weeks, or it could be a few months at best. Should Allan pay a RAD or just pay the DAP?
If he pays a RAD and then dies shortly afterwards, the RAD forms part of his estate. The RAD can only be released to the estate upon receipt of a letter of probate from the family solicitor. This can take months, whereas if Allan had left the funds in superannuation (example) with his wife as beneficiary, the funds would go to her a lot more quickly, not to mention avoiding the need for letters of probate which are costly. It may also be wise for Allan or his family to check with his bank as to whether a letter of probate is required to close his bank accounts and for what amounts, upon Allan’s death.
We shouldn’t assume that paying a RAD is the best outcome. There are other considerations that the family needs to take into account. If you identify any of the above issues with the people you provide care for it would be wise to refer them to see one of our knowledgable financial advisers.