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Entering residential aged care will often necessitate entering into legal and financial arrangements where a client would need to have contractual capacity or have given powers to their attorney to act on their behalf, including an Enduring Power of Attorney (EPOA) which comes into effect when the client is mentally incapable of making decisions.
Compounded with the prevalence of dementia amongst those in aged care, the need for estate planning to be in order when one has capacity to make decisions becomes an urgent concern for ageing clients.
Throughout the years, in numerous conversations with advisers, there are some common estate planning issues in aged care which come to the forefront. While some of these situations touch on the legal aspects, they can also affect social security and aged care means testing.
This article takes you through a high-level discussion of these issues to aid with clients making informed decisions with a call to action for clients to seek legal advice when relevant and needed.
It perhaps wouldn’t come as a surprise for many advisers that clients enter aged care later in life and with entry later in life many clients unfortunately don’t stay in aged care for long.
The average age of entry in 2022-23 was 83.5 for men and 85.3 for women1. With the passage of time, the average age of entry has been gradually increasing - for example, in 2017-18, the average age of entry was 82 years for men and 84.5 for women2. A plausible explanation for this may be the consistent increase in Home Care Packages since July 2014, allowing clients to live in their own home for as long as possible until entry to residential aged care is necessitated. While the average stay in aged care was approximately 3 years, women stayed on average 1 year longer than men in 2022-233. Of interest, approximately, one third of
residents passed away within 12 months of entry3 highlighting that for a significant proportion of clients, they may not be in aged care for a long time. The average stay in residential aged care has been consistent in the recent past with the average stay in 2017-2018 also being o approximately 3 years2.
While reportedly, less than half of the overall population have a Will, according to a report from Australian Institute of Family Studies4, the vast majority of older clients had a Will with approximately 80% of those surveyed in the 65-69 cohort increasing to approximately 97% of those aged +85 had a Will. Approximately one third of those in the 65-69 cohort had granted a Power of Attorney increasing to approximately 61% for those aged +85.
While the vast majority of older clients may have the relevant important estate planning documents, there is likely ‘no guarantee those documents are up-to date, well-drafted and likely to be considered legally valid’5.
Given that more than 50% of residents in residential aged care are living with dementia6, which is a trend that is likely to continue, the need for estate planning to be in order is highlighted and made more urgent. Once someone is suffering from dementia, it may not be possible to rearrange financial affairs and execute estate planning documentation.
In broad terms, one of the requirements to make a Will is that a person must have testamentary capacity. Where one has dementia, their ability to make or amend a Will may not be possible which may hinder with estate planning wishes. That said, if the issue is important to the client, an application to the Supreme Court in the relevant jurisdiction can be made for a Will to be made or amended7.
If the client does not have a POA or an EPOA or an Advanced Care Directive, their entry to aged care may have some obstacles given that they may need to provide consent, for example to receive certain medical treatment as well as the need to enter into legal and financial relations, for example with the aged care facility or with an advice firm where advice is sought.
If a client lacks a POA or an EPOA and if it is needed to transition a client into aged care, then usually an application with the relevant government organisation would need to be made which takes time and potentially incurs costs if legal practitioners are engaged.
In discussion with advisers, here are some of the common situations that we come across which touch on estate planning issues.
Unpaid Refundable Accommodation Deposits (RADs) incur a Daily Accommodation Payment (DAP) where effectively a government prescribed interest rate (currently 8.38%) is charged on the unpaid RAD. The DAP can be a significant cashflow impost in terms of funding aged care costs.
To that end, sometimes a child with sufficient means decides to pay their parent’s RAD to save the DAP in the belief that they will receive these funds back upon their parent’s death.
However, if the Will nominates multiple beneficiaries and / or does not provide for the RAD refund to come back to the child who loaned the funds, it is possible that the refunded RAD may not come back to the child. The issue may be exacerbated with unintended consequences if the parent has no Will and the estate is distributed in accordance with intestacy rules.
In these circumstances, it may be preferred for the child to have a loan agreement with their parent so that payment of the RAD is a loan and the executor is required to repay the RAD to the child before distributing the residual estate.
Legal advice in formalising the loan arrangement may be needed to ensure that in the event of conflict that a loan is legally enforceable, noting that certain intended loans where the conduct between the parties has not been conducted in a commercial loan like manner including features such as repayments, term and security may be irrecoverable after 6 years8.
Earlier in this article, we discussed, the uncertain but expected relative shorter life expectancy for those who enter residential aged care. Where a client’s partner passes away and they become a single person, the effect on social security entitlements and aged care means testing may be an important consideration while ensuring that the surviving spouse has sufficient funds to maintain their current and future spending needs.
As is usually typical, where the Will provides for the surviving spouse to inherit their partner’s assets, it may be a consideration to divert estate assets to beneficiaries other than the spouse to minimise the impact of owning higher assets but having lower allowable means testing thresholds for social security and aged care purposes. Diverting assets to beneficiaries other than the surviving spouse through the Will does not give rise to any gifting concerns for the surviving spouse.
Relating to terminally ill clients or where there is an expectation of imminent death, any gifts made by the deceased do not affect the surviving spouse as long as the deceased owned that asset solely from a social security and aged care gifting perspective.
Additionally, if the asset was owned jointly such as a joint bank account or shares, any gifts made by the deceased during their lifetime in the last 5 years do not count as the surviving spouse’s asset upon death. However, the surviving spouse will be assessed under the deprivation rules for five anniversary years on gifts over allowable limits on 50% of the asset value.
Testamentary trusts can assist with providing benefits to beneficiaries while catering for specific wishes of the deceased. The Will usually stipulates the powers given to the trustee of the testamentary trust in administering the trust and distributing trust income and capital.
Acknowledging the benefits of testamentary trusts in the right circumstances, an issue to contend with is their social security and aged care assessment. While the assessment of testamentary trusts is highly dependent on the facts of the case and can be complex, there are three high level principles where the trust comes into existence upon the death of a partner:
If the surviving partner or an associate of the surviving partner does not control the trust, attribution of assets and income is made in accordance with the usual rules which considers control of the trust (such as trusteeship and appointer) and for whose benefit the trust is established.
If the testamentary trust is established upon the death of a non-partner such as a parent, then the attribution of assets and income is based in accordance with who controls the trust and for whose benefit the trust is established.
It is also possible that some testamentary trusts are established where particular beneficiaries are restricted from benefiting from trust capital but can receive trust income. In these cases, it is possible for Centrelink to determine 0% asset attribution9 but an income attribution of up to 100%.
As clients enter residential aged care and if they have superannuation, one of the decisions they have to make, considering the relative shorter life expectancy, is whether to retain funds in superannuation or withdraw outside of super. In making this decision, considering the type of assets to liquidate to fund payment of the RAD and whether to use super or other assets, forms part of the evaluation process. The issue of retaining or withdrawing super is especially urgent for single clients with non-dependent beneficiaries where the taxable component – element taxed portion of the death benefit may be taxed at up to 15% + 2% Medicare Levy.
In making the call around whether to retain or withdraw super, some of the factors which may be relevant in the decision making are:
CarePlus is a purpose-built product solution for aged care clients which can be helpful in improving client outcomes on the various advice levers such as maximising social security entitlements, minimising aged care fees, improving cashflow compared to other defensive assets as well as minimising tax when relevant. Upon death at any time, CarePlus provides 100% return of the purchase price (for South Australian residents, 1.5% stamp duty is deducted from the Insurance component).
In relation to estate planning, there are a number of benefits to consider, including features that can help simplify estate administration as well as providing estate planning certainty.
Clients can nominate single or multiple beneficiaries or the estate to receive the CarePlus death benefit. If no beneficiary is nominated, the death benefit is paid to the estate. Beneficiaries can be changed at any time and valid nominations are binding, providing certainty to clients and their beneficiaries. Challenger allows a Power of Attorney to nominate themselves or another person as a beneficiary if they have the legal authority under the Power of Attorney document. Challenger requires specific wording (or wording that is substantially similar in nature) to be in the Power of Attorney document before the nomination will be accepted. The required wording for each state is detailed in the Additional Information Guide. The applicable Power of Attorney legislation is different in each State and Territory and can change over time. It is strongly recommended that clients obtain independent legal advice regarding their legal obligations and the extent of their authority under the Power of Attorney document.
Probate is often an essential step required before an executor can administer a deceased estate and distribute it to the beneficiaries. When paying CarePlus death benefits, Challenger currently does not require probate if there is a valid beneficiary nomination or if the death benefit is payable to the estate and is less than $500,000. This can reduce the time it takes for beneficiaries to receive bequests.
Where there is a valid beneficiary nomination, Challenger will pay the death benefit directly to that beneficiary bypassing the estate. This can help simplify the administration of the estate and in some States and Territories where probate filing fees are dependent on the size of the estate, help reduce the cost of applying for probate.
The CarePlus death benefit paid to the estate and/or nominated beneficiary(ies) is not subject to tax. This can help with providing estate planning certainty to clients and their beneficiaries. However, if the investor resides in South Australia, stamp duty (currently 1.5% of the insurance premium) will be deducted from the total death benefit before it is paid to the estate and/or nominated beneficiary(ies).
