As we get older we may need help with our daily living activities. The frailty of older age or some illnesses may make it harder to live independently without help from a spouse, family or aged care service provider.
Asking for help does not mean you will have to move out of your home. The government now subsidises more home care packages which might allow you to reduce the burden on your spouse and family but continue to receive the care you need in your own home.
For some people, a move into residential care where you can be supported 24 hours a day might be a more suitable option. However, the important thing to realise is that you have choices.
You also need to understand what fees are payable and whether you have any opportunity to reduce the amount you pay for this help. This is where advice is important.
What does care cost?
Before you can apply for a subsidised home care package you need to be approved by an Aged Care Assessment Team / Service. You can find more information at www.myagedcare.gov.au
The fees for home care are in two components:
A basic fee paid by all care recipients
An income-tested fee paid by care recipients who receive a part Centrelink/Veterans’ Affairs pension or are self-funded.
The fees applicable to 19 September 2020 are shown in the diagram below:
Level 1 package - $9.72 per day ($3,547.80 per year)
Level 2 package - $10.28 per day ($3,752.20 per year)
Level 3 package - $10.57 per day ($3,858.05 per year)
Level 4 package - $10.85 per day ($3,960.25 per year)
*Indexed 20 March and 20 September
50% of your income over certain thresholds
Up to $11,335.48 per year
Alice lives at home with her husband and has been approved for a Level 4 home-care package. They are fully self-funded and do not qualify for any age pension. Together they have $85,000 a year of assessable income.
On her share of the income ($42,500) it is estimated that Alice will be asked to pay:
Basic fee - $3,960.25 per year, plus
Care fee - $6,193 per year.
Note: Each member of a couple (where both living at home) can have assessable income up to $21,762 before an income-tested care fee is payable.
Reducing home care fees
When calculating the fees, assessable income includes payments received from Centrelink or Veterans’ Affairs as well as assessable income from assets and investments using Centrelink income test rules. For example, cash, term deposits and shares will be assessed under deeming rules.
If you are able to structure your investments in a way that reduces assessable income this may reduce the fees you will be asked to pay. But it is always important to review your full situation to ensure that sufficient cash flow can be generated and to determine the impact on your net wealth.
For example, if the income-tested care fee is likely to be high, one strategy you may wish to seek advice on is setting up a discretionary family trust and gift money from your name into this trust. The trust can then invest this money into an insurance bond. This won’t change how much you have in assessable assets.
But the strategy may help to reduce assessable income which is calculated as the actual taxable income generated by the family trust. As long as you don’t make withdrawals from the bond within the first 10 years (or until death of the life insured) there is no taxable income for the trust.
Tax on earnings is paid by the life insurance company. Net earnings are added to account to increase asset value.
No income distributions are received if money remains invested (at least 10 years or until death of life insured) so trust creates no assessable income.
Alice seeks advice on how to structure investments to pay the additional expenses for home care. Her adviser recommends setting up a family trust and they transfer enough of their investments into the trust to reduce the income-tested care fee to nil.
This reduces her fees by $6,193 per year and she will now only pay the basic fee of $3,960.25 per year.
In the first year Alice will incur some expenses to set up the trust and investment strategy and for advice. She may also incur ongoing fees for reviews and operation of the trust. The insurance company pays tax at 30% which may be higher than her personal tax rate but it is the after-tax return which is important to compare.
It is important for Alice and her husband to ensure this strategy leaves them enough cash flow (or cash reserves) to pay their living expenses because to make this strategy work, they are limited in their ability to make withdrawals from the family trust.
Alice and her husband also restructured their wills and estate planning due to this change in assets.
Note: This strategy may suit a person with high levels of assessable income. It could provide savings up to $11,335 per year by reducing the income-tested fees. This amount is per eligible person so savings could double if both members of a couple are accessing home care packages. The outcome depends on individual circumstances and advice is necessary.
Before making any changes to investments it was important for Alice and her husband to seek financial advice. The recommended strategy helped to reduce fees in the first year (and possibly a similar saving each year) but they needed to consider implications for cash flow, Centrelink or other concession cards, aged care fees, taxation and estate planning before making a decision.
IMPORTANT INFORMATION: This document has been prepared by Aged Care Steps Pty Limited, ABN 42 156 656 843 AFSL 486723, registered tax (financial) advisers (25581502) based on our understanding of the relevant legislation at the time of writing. While every care has been taken, Aged Care Steps Pty Limited makes no representations as to the accuracy or completeness of the contents. The information is of a general nature only and has been prepared without consideration of your individual objectives, financial situation or needs. Before making any decisions, you should consider the appropriateness for your personal investment objectives, financial situation or individual needs. We recommend you see a financial adviser, registered tax agent or legal adviser before making any decisions based on this information.