Entering residential aged care later in life and with an average stay of approximately 3 years, means estate planning concerns are usually an important consideration for many clients. These concerns often revolve around ensuring that legal documentation, such as Wills and Power of Attorney (POA) have been organised and that upon death, the right assets are given to the right people at the right time. 


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. 

 

Numbers highlight the issues 

 

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. 

 

Average age at admission and stay in residential aged care


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. 


Prevalence of Wills and POA documentation


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.


Existence of dementia can present challenges from an estate planning perspective

 

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.

 

Common situations 


In discussion with advisers, here are some of the common situations that we come across which touch on estate planning issues.

 

Children paying for parent’s aged care fees

 

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.

 

Till death do us part – couples becoming singles 


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.

 

Assessment of discretionary testamentary trusts

 

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: 

 

  1. If the surviving partner has control of the trust (irrespective of whether the surviving partner is a beneficiary), the surviving partner is attributed with the assets and income of the trust
  2. If an associate (such as a child) of the surviving partner has control of the trust and the surviving partner is a potential beneficiary, then the surviving partner is attributed with the assets and income of the trust 

  3. 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%.

 

Aged care and superannuation issues

 

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: 

  • Given that the timing of death is uncertain, weighing up the advantages and disadvantages of retaining and withdrawing including any assumed time period(s) for the analysis when highlighting the impact of the decision to the client.
  • Considering the super death benefit lump sum tax rate incurred by non-dependent beneficiaries (up to 17% on the taxable component – element taxed) when retaining contrasted to the personal income tax, if any, on the investment earnings outside of super, including the use of a higher tax-free threshold through the Seniors and Pensioners Tax Offset (SAPTO).
  • Estate planning issues where superannuation is usually a non-estate asset, unless a nomination is made to the estate and the certainty of achieving distribution to superannuation dependants (such as adult children) through a binding nomination contrasted to estate assets such as non-joint bank accounts, shares and managed funds which may have to be distributed as per the Will.

 

Challenger CarePlus 

 

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. 

 

Ability to nominate beneficiaries 

 

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 not required 

 

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. 

 

Non-estate assets and reducing the cost of probate 

 

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. 

 

Tax-free death benefits 

 

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).

Related content

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1 2022–23 Report on the Operation of the Aged Care Act 1997 (gen-agedcaredata.gov.au)
2 2017–18 Report on the Operation of the Aged Care Act 1997 (gen-agedcaredata.gov.au)
3 Financial Report on the Australian Aged Care Sector 2022–23 (health.gov.au)
4 National Elder Abuse Prevalence Study: Final Report (aifs.gov.au)
5 UARC Australia’s Aged Care Sector Mid-Year Report 2023-24.pdf (uts.edu.au)
6 Dementia in Australia, Residential aged care - Australian Institute of Health and Welfare (aihw.gov.au)
7 For example in NSW, SUCCESSION ACT 2006 - SECT 18 Court may authorise a will to be made, altered or revoked for a person without testamentary capacity (austlii.edu.au). The concept of a Court approved Will also exists in other States and Territories.
8 For example, specifically in NSW, Section 14 of Limitation Act 1969.
9 Pavlakis and Secretary, Department of Families, Community Services and Indigenous Affairs [2006] AATA 233 (13 March 2006)
The information in this article is current as at 1 October 2024 unless otherwise specified and is provided by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 (Challenger, our, we), the issuer of the Challenger annuities (Annuity(ies)) and Challenger Retirement and Investment Services Limited ABN 80 115 534 453, AFSL 295642 (CRISL). The information in this article is general information only about our financial products and is intended solely for licensed financial advisers or authorised representatives of licensed financial advisers, and is provided to them on a confidential basis. It is not intended to constitute financial product advice. This information must not be distributed, delivered, disclosed or otherwise disseminated to any investor, without our express prior approval. Investors should consider the applicable Annuity Target Market Determination (TMD) and Product Disclosure Statement (PDS) available at challenger.com.au and the appropriateness of the applicable product to their circumstances before making an investment decision. This information has been prepared without taking into account any person’s objectives, financial situation or needs. Neither Challenger and/or CRISL, nor any of its officers or employees, are a registered tax agent or a registered tax (financial) adviser under the Tax Agent Services Act 2009 (Cth) and none of them is licensed or authorised to provide tax or social security advice. Before acting, we strongly recommend that prospective investors obtain financial product advice, as well as taxation and applicable social security advice, from qualified professional advisers who are able to take into account the investor’s individual circumstances. Each person should, therefore, consider its appropriateness having regard to these matters and the information in the Target Market Determination (TMD) and Product Disclosure Statement (PDS) for the applicable Annuity before deciding whether to acquire or continue to hold the product. A copy of the TMD and PDS is available at challenger.com.au or by contacting our Adviser Services Team on 13 35 66. Any examples shown in this article are for illustrative purposes only and are not a prediction or guarantee of any particular outcome. Age Pension benefits described in this article will not apply to all individuals. Age Pension outcomes depend on an individual (or couple’s) personal circumstances and may change over time. This article may include statements of opinion, forward looking statements, forecasts or predictions based on current expectations about future events and results. Actual results may be materially different from those shown. This is because outcomes reflect the assumptions made and may be affected by known or unknown risks and uncertainties that are not able to be presently identified. Where information about our products is past performance information, past performance is not a reliable indicator of future performance. Challenger and CRISL relied on publicly available information and sources believed to be reliable, however, the information has not been independently verified by Challenger and CRISL. While due care and attention has been exercised in the preparation of this information, Challenger and CRISL gives no representation or warranty (express or implied) as to its accuracy, completeness or reliability. The information presented in this article is not intended to be a complete statement or summary of the matters to which reference is made in this article. To the maximum extent permissible under law, neither Challenger, CRISL, nor its related entities, nor any of their directors, employees or agents, accept any liability for any loss or damage in connection with the use of or reliance on all or part of, or any omission inadequacy or inaccuracy in, the information in this article.

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