Nick Bruining: Thinking of selling folks’ house to pay for their aged care? That could be a costly mistake

It’s a tough decision that’s often made in a hospital carpark.

Dad’s been admitted to hospital following a bad fall, and the clinical advice is he now needs full-time care. That means going home is no longer an option, even with a top-of-the-range Support At Home package.

As brutal as it is, probability and statistics can play a big part in what happens next.

Most people you ask have no plans to spend their last days in an “old people’s home” — “Just wheel me out the front door of my home horizontally . . . and straight into the back of the unmarked van.”

The truth is, with a greater number of Support At Home packages available, that option is now more realistic than ever.

Nonetheless, some people like the idea of being waited on 24/7 in a place that’s comfortable and secure and, in some cases, Support At Home might be inadequate for the amount of care that’s required.

The problem is, you can’t just decide to make the move into aged care. Dad needs to be assessed and receive an approval for residential aged care.

To pay for the bed and room in an aged care facility, you can stump up a lump-sum refundable accommodation deposit, which typically varies between $300,000 and $750,000 or more, depending on the amenities. Once paid, that’s it for for accommodation costs. When Dad leaves the facility, most of the RAD is paid back — typically to the estate.

Option two is to pay a daily accommodation payment, which is based on the unpaid amount of the RAD, multiplied by a quarterly and government-set interest rate. This is currently set at 7.96 per cent a year. The total interest figure is then divided by 365 to give you the DAP amount.

The natural inclination might be to sell up everything, including the family home, then use the proceeds to fully fund the RAD and ensure Dad enjoys the best experience possible. He’ll still be up for a daily care fee, hotelling contributions and non-clinical care contribution which will vary depending on other assets.

The “sell-up everything” approach, even with approval, can really stuff up the finances — not only for him but possibly for his beneficiaries when he eventually passes.

The other factor is the stark number lifted from aged care data, published by the Federal Government. In 2023-24, the average stay in residential care was just 19 months.

For starters, selling the family home means you can probably kiss goodbye to a Centrelink age pension, unless you can offset this by paying a significant RAD which is also exempt.

Aged care rules are not the same as the Centrelink rules. The family home is exempt from Centrelink asset testing for two years after someone moves into an aged care facility. That means their home could be retained and even rented out while receiving an age pension to help pay for the daily care costs.

Sell the family home and any money left over after paying the RAD is immediately means-tested. That could end up blowing the Centrelink pension right out of the water. Similarly, selling shares and other assets might well give rise to big capital gains tax liabilities.

Were those assets retained — perhaps with only some sold to meet the daily costs — that tax could be deferred to what might be a better time to liquidate. That includes transferring the remaining assets directly to the beneficiaries when Dad dies.

Let’s say the RAD is $650,000 and you stump up $150,000. The unpaid RAD of $500,000 attracts the DAP interest rate of 7.96 per cent, giving a total of $38,800 a year, or a DAP of $109.04 a day.

Now, you can either pay the monthly total or choose to have this erode the $150,000 amount initially contributed. Of course, as each monthly payment comes out, the DAP will be going up.

And remember, the DAP is not the only ongoing fee. There will be the basic daily fee, hotelling contributions and non clinical care contribution to cover as well.

The analysis becomes a rather ugly exercise comparing Dad’s total net financial position after tax and fees if you sell up now, versus how long the DAP funding might need to be in place while covering the other ongoing fees which can be significant.

It becomes even uglier still when you have to be a pragmatist and consider life expectancy.

It’s also why specialist aged care financial planners will never be out of work.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association