To keep or sell the family home – an interesting discussion

This is a common question, which at face value has an either/or outcome, and is generally based on immediate need, driven the fact that a loved one needs to go to care, and that the family has been told they need to pay for the costs from their loved one’s assets.

Most of the time, the most significant asset held by a resident going to care, is the family home, and the immediate decision is to sell the home and use this to pay the accommodation payment, which in most capital cities around Australia is in the $100,000’s.

Now, I saw an article posted in the Western Australian today by a Financial Planner saying that the “Why selling the family home to fund aged care may cost you a Centrelink pension”. And to be honest this can be the case, depending on a variety of things:

• The value of the home when cashed out.
• The value of the residents’ other assets
• The amount of the RAD that will be paid with the sales proceeds
• How the other assets and net cash once the RAD is paid will be tested (income / assets tests)
• Is it even appropriate to try to retain the age pension if lost pension can be replaced / supplemented

Don’t get me wrong, the author in the Article raises an interesting question. But I believe that this is a short-sighted approach. Fixation on retaining an age pension that pays $1,144.40 per fortnight (couples will be paid this amount as they are separated due to illness) is driven not by the income provided, but the Pensioner Concession Card. However, the Commonwealth Seniors Concession Card provides similar benefits, and the same access to the Pharmaceutical Benefits Scheme (PBS).

Let’s look at a few things that we need to consider when keeping the home. In the article the author did not look at:

• The current assets test threshold for a homeowner is significantly lower than that of a non-homeowner. I question if this asset test gap is big enough to really matter, but the thresholds are as follows:

• Therefore, if a resident’s family sells the former home, the assets test that applies to the age pension will increase to compensate for the sales proceeds hitting the residents bank account.
• Any funds paid to a RAD are not counted towards the assets test for an Age Pension. Therefore, if a Resident had $1,000,000 in cash after costs, and the accommodation payment was $550,000, which they paid towards their RAD, they would be under the threshold of a Full Pensioner, if that was their only significant asset. If there are other assets in the mix like shares, they could still qualify for a part pension.
• He is using that excuse that the average stay in care is 11 months. However, my experience in the Age Care advice space is that, while this may be an average stay, it is a low average. Half the population will pass before this, and half the population will pass after this. I have clients in care who have been there significantly longer than 11 months. Most have in fact.
• Finally, he is not considering the costs of daily payments overtime. He is correct that based on a $550,000 Accommodation Payment will have an interest rate of 8.38%. If the family paid the DAP only that means a payment of $46,090.
• If they were to pay a part RAD of $50,000, and DAP on the remaining payment, that is $41,900. However, this will not be enough to cover the full year if they draw the DAP from the RAD. But his $41,900 is not the amount of DAP paid, it is more like $43,547.
• But what about other costs? The Means Tested Care Fee, Basic Daily Care fee, or Additional Services / Extra Services fees. These all need to be covered from the residents pension. Will it be enough?.
• My experience shows that on average, DAP payments are significantly higher than Means Tested Care Fees. And even if the Means Tested Care Fee is higher, current annual and cumulative lifetime caps apply for residents who enter permanent residential care before 1 July 2025.

So, let’s look at the cash flow situation based on a resident needing to go to Care Today. Please note that these numbers, rates and calculations are valid for today (30 Sept 2024).

Our resident, Jimmy, is aged 81, owns his own home worth $1,000,000 (net of sales costs), Contents of $1,000, cash of $50,000 and Shares of $100,000. I have allowed $7,800, for incidental costs in the home and not factored in any additional /extra services fees that can apply or property expenses.

So, what I have looked at is the following:

1. Pay a DAP only
2. Part RAD - DAP from RAD
3. Sell and pay full RAD - Bank surplus
4. Sell and pay full RAD -use an annuity for income

Based on this:

So, while keeping the home can provide for a full Age Pension, what needs to be considered is the following:

• The uncapped nature of a DAP payment. This will be paid at the rate for as long as the resident is in care. This rate can easily outstrip the current means tested care fee cap, and in the above example, what this client would be assessed for under the current rules.
• How are other expenses being covered. If we take $50,000 from his current investments /cash and contribute this to a RAD, and then draw the DAP from RAD, how are we covering other costs? In the above he can from his pension, but if there is an extra / additional services fee, that can easily go the other way.
• What happens if he is in care for more than the suggested DAP from RAD approach allows for? After 3 years, the resident has no funds to cover costs, and we have eroded the estate for no real gain. We wind up selling the home anyway.
• How will they pay the property costs going forward? 85% of the pension will be going to cover Basic Daily Care Fees.
• What happens when the Pension 2-year exemption is reached? It is worth noting that this is a hard deadline, and the home MUST be sold with the sale completed within 2 years.

However, if the home is sold (even later than the first quarter in care) and proceeds used to pay the RAD, we eliminate DAP this expense. However, the resident will have an increased means tested care fee, but this will be lower than the current DAP.

And if the adviser was to recommend an annuity style investment for the resident, they will be able to further increase the income to the resident, allowing them to maintain their expenses in a stable format going forward.

Don’t get me wrong, there are myriad reasons to keep the former home, and one of which is the wishes of the resident in care. But to dismiss it out of line due to Age Pension is not a valid reason when other income streams can be found, and increased assessment thresholds are available for non-homeowners.

One thing the author of the article that prompted this, did get right, when it comes to Age Care, professional Financial Advice should be sought. However, that adviser should also be an Age Care Specialist as the matter is more complex than a simple Keep versus Sell conversation.