The final phase of the Living longer living better. Applied financial planning

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1 38 Julie McKay, head of technical and research, Bendigo McKay joined Bendigo and Adelaide Bank in Her responsibilities included managing structured products and wealth finance products and she is currently head of technical and research for Bendigo Wealth. Prior to joining the Group, McKay held various roles with the Commonwealth Bank over a 10 year period. These roles included head of structured equity products (distributing Investment product through CommSec and the private bank), senior executive business planning reporting to the then CEO David Murray and executive market risk policy. Prior to Commonwealth Bank she managed operations for an Australian commodity trading adviser (CTA) and worked in Sydney and Hong Kong for Bank of America. Caring for older family members in the community Julie McKay The final phase of the Living longer living better aged care reforms are due to come into effect from 1 July These significant reforms have focused adviser attention on residential aged care. Making decisions about residential care for older family members can be complex, emotional and potentially stressful. Residential care is often a last option, with in-home or family based care more likely to be a first and preferred stage in caring for elderly family members. Advisers need to be familiar with the rules related to special residences (granny flats, retirement villages and sale and leaseback homes, although the latter is not covered in this article) and how decisions about in-home care might impact future decisions about residential care and estate planning. with in-home care Access to support services, such as cleaning, shopping or nursing to manage health conditions or a transition from hospital, can make it more practical for elderly people to live independently or with family members. There are a wide variety of services, providers and federal and state/territory based rules and subsidiaries. Government funded services are primarily available through two programs: home and community care (HACC) and home care packages. Accessing any government subsidised service usually involves a needs assessment and a means test. HACC is generally for customers who are reasonably capable of looking after themselves but who need some simple home, medical or social support. A needs assessment is typically conducted by the subsidised service provider. Customer charges vary between providers and states or territories. The home care packages come under the age care act and are affected by the Living longer living better reforms. Advisers may be familiar with the previous community aged care package (CACP) and extended aged care at home (EACH) packages. Four levels of home care packages replace these packages (broadly level 2 replaces CACP and Level 4 replaces EACH). Home care packages are generally a coordinated range of personal, home, social and medical services specific to a customer s more complex needs and circumstances. To access these packages, customers will need an assessment by a member of an aged care assessment team (ACAT or aged care assessment service ACAS in Victoria). The basic fee for a home care package is up to $ per person per fortnight (from 20 September 2013 to 19 March 2014). Customers on higher incomes may be asked to pay an income tested fee of up to 50% of their income above the age pension. From 1 July 2014: A customer receiving the full age pension pays no income tested fee. A customer on a part age pension may pay an income tested fee up to $5,000p.a. A self funded retiree (income greater than $43,186p.a.) may pay an income tested care fee up to $10,000p.a. There is a $60,000 lifetime cap on income tested care fees. THE AUSTRALIAN JOURNAL OF Financial PLANNING

2 Applied financial planning 39 Principal home and the age pension The key issue for most people when considering a granny flat or retirement village is what do with the family home. Decisions may impact the customer s current age pension as well as future residential care and estate plans. The amount of age pension an eligible person receives depends on their assets, income, whether they are a member of a couple and their home ownership status. If a customer is living in a special residence (a granny flat or retirement village), their former home becomes an assessable asset under the age pension asset test. After moving into a special residence their home ownership status is determined by comparing their entry contribution (EC) with the extra allowable amount (EAA). The EC is generally the amount the customer pays to enter a special residence but is explained in more detail below. The EAA is the difference between the age pension asset test threshold for homeowners and non-homeowners ($143,000 from 1 January 2014 to 20 March 2014 ). The following table shows the home ownership for a single customer living in a special residence. Test Home ownership status Rent assistance EC <= EAA Non-home owner May be eligible EC > EAA Home owner Not eligible Advisers should be careful about applying these general rules to a couple. Each member of a couple is assessed separately (usually on a 50/50 split of assets) and special rules can apply to illness separated couples (for example, one member in a granny flat and the other in a residential aged care facility). Granny flat There is increasing interest in granny flats by property owners in some states/territories because of changes to local development approval rules. This article is concerned with the factors affecting customers considering moving into granny flats rather than issues related to property development. A granny flat is often thought of as a self-contained unit within or attached to another home. However, for age pension purposes the definition of a granny flat doesn t depend on its physical characteristics. For example, a granny flat can simply be the right to live in a room in a house. To be assessed under the granny flat rules, the customer must establish three elements: They paid for a right to live in accommodation for the rest of their life. This can be either a life tenancy or a life interest (further explained below). The granny flat is in a private residence and is to be the customer s principal home. The customer, their partner or an entity (e.g. a trust or company) that the customer or their partner controls doesn t own the property which contains the granny flat. There is no test for age or family relationship in theory a customer can create a granny flat within the property of a stranger and the customer doesn t have to be elderly (although eligibility for the age pension is obviously age based) or infirmed. Also no measure or value is placed on the support (if any) provided by the property owner. Centrelink imposes no requirement to document a granny flat. However, advisers should recommend that customers and property owners seek separate legal advice and document their arrangements. This is particularly important as a granny flat usually involves a substantial transfer of assets and ongoing legal, taxation and social security implications. Generally, a life tenancy gives the customer the right to live in the granny flat only. Thus if they temporarily moved out they are not entitled to any rent earned on the granny flat. In contrast, a life interest gives the customer the right to live in the property and any benefit (e.g. rent income) from the property. Which one may be suitable in a given circumstance may depend on the physical characteristics of the granny flat (for example a detached building might suit a life interest while rooms within a home might suit a life tenancy). Either way a life interest and life tenancy exists only during the customer s lifetime and doesn t form part of their estate. The property owner can t simply terminate a life interest/tenancy while the customer is alive (whether they are living in the granny flat or not). The property owner may be able to: Sell the property with the interest/tenancy as a condition of sale. Transfer the interest/tenancy to another property (with the permission of the customer), or Compensate the customer financially for the loss of their interest/tenancy. While this appears straight forward on paper, changing a granny flat arrangement can obviously involve complex financial, family and emotional decisions. The creation of a life interest/tenancy is generally a capital gains tax (CGT) event for the property owner. The property owner may lose part of any main residence CGT exemption while the life interest/tenancy exists. Further, the property owner (usually the primary carer), the customer and their wider family may have different expectations and understandings (for example paying rent or other costs such as rates, utilities and insurance or inheritance expectations) and may not consider how their circumstances may change (for example relationship break down or additional children). Valuing a granny flat There is no independent market for valuing a granny flat. The assessed value (in other words the entry contribution or EC) depends on how the customer pays to acquire the granny flat. Generally, a customer swaps their current home for the life interest/tenancy. The most common methods of acquiring a granny flat are: Generally, a life tenancy gives the customer the right to live in the granny flat only. THE AUSTRALIAN JOURNAL OF Financial PLANNING

3 40 Retirement villages generally accommodate customers, both singles and couples, aged over 55. Payment method Value of granny flat Customer transfers title of home to Value of the home transferred to carer carer in exchange for life interest/tenancy Customer sells home and uses proceeds Building costs to build or convert carer s property to suit (Sale proceeds that will be used to needs and establishes a lifetime right to build are generally exempt from age reside there pension asset test for up to 12 months) Customer sells home and buys property Value of the property purchased in carer s name while establishing life interest/tenancy in the carer s name However, Centrelink may apply a special valuation if the customer transfers other assets to the carer (for example, the customer transfers their home and cash) or appears to be manipulating their assets to gain a social security advantage. In these circumstances, the reasonable amount to pay for a granny flat is calculated by multiplying the annual age pension rate (including pension supplement) for couples (regardless of whether the customer is classified as single or a couple) and an actuarial factor related to the customer s age (or the age of the youngest member of a couple) at their next birthday. If the customer transfers assets other than (or in addition to) their home to the carer, the value of the granny flat can t be more than the calculated reasonable amount, or the value of the home transferred to or acquired for the carer. Provided a customer pays no more than a reasonable amount or only transfers their home to the carer, then there will be no asset deprivation. Example Malcolm turns 84 on his next birthday and is married to Irene who turns 77 on her next birthday. They plan to establish a granny flat by transferring their $300,000 home plus $80,000 cash to their daughter, Maddie. Reasonable amount Assessed value $31,968 (age pension including supplement for couple from September 2013 to March 2014 ) x (actuarial factor for Irene) = $374,985 Reasonable amount > $300,000 value of transferred home therefore assessed value of granny flat = $374,985 Deprived assets The total value of assets transferred to Maddie ($380,000) is greater than the assessed value. Therefore deprived assets = $5,015 The deprived assets are within the $10,000 gifting limit and won t be deemed. Contrast Jeanne who will turn 77 on her next birthday. She transfers her home worth $480,000 to her son Michael in exchange for a granny flat attached to Michael s home. As Jeanne only transferred her former home, the value of the granny flat is simply the value of that home and there is no need to calculate a reasonable amount for the granny flat. If the customer is assessed as a non-home owner (EC < EAA as explained above) then the value of the granny flat is included in age pension asset test but not deemed for the age pension income test. If the customer is assessed as a home owner (EC > EAA as explained above) then, as for any principal home, the value of the granny flat is excluded from the age pension asset test and income test. In the example above, Malcolm, Irene (assessed separately) and Jeanne are all homeowners. In Malcolm s case, his share of the couple s EC ($374,985/2 = $187,492.50) is greater than the EAA. Similarly, Jeanne s EC ($480,000) is greater than the EAA. Retirement villages Retirement villages generally accommodate customers, both singles and couples, aged over 55 (although the average age tends to be higher) and are primarily regulated by state governments. Retirement villages tend to be popular with younger retirees (55-64 years), who have adequate financial resources, need some assistance with daily living, are concerned with security and possibly reduced cohesion in their current neighbourhood but who still want independence and privacy. The top 5 factors encouraging a move to a retirement village: Factor Overall with with with declining health with 5 Less stress Less stress Less stress Inbuilt Accommodation ranges from units, townhouses, freestanding homes and manufactured homes, which are sometimes called mobile or relocatable homes. It may be a bed-sit or a multi-bedroom villa. It often includes additional fixtures and fittings that are appropriate for older customers, such as emergency call buttons, an intercom system and handrails. Retirement villages usually provide common areas and such as gardens, lounge and dining rooms, community, craft, games or computer rooms, library, hairdressing salon, medical consulting room, workshop, bar, swimming pool, golf course, BBQ area, visitor parking, etc. The general services provided for customers vary from place to place, but usually include general management and administration. Additional services may include arranging activities, excursions, shopping trips and emergency call system monitoring. Villages may also offer a range of personal services including meals, cleaning, laundry and personal care, such as assistance with bathing and dressing. Villages can comprise independent living units ( self-care units analogous to a low care place in a residential aged care facility), serviced apartments ( assisted living units analo- THE AUSTRALIAN JOURNAL OF Financial PLANNING

4 Applied financial planning 41 gous to a high care place in residential aged care facility) or some combination of both. Retirement villages are further complicated by the variety of legal ownership, documentation requirements, many different fee arrangements, and different statebased and federal legislation (for example state-based retirement village regulations as well as fair trading and consumer laws). Customers may be required to pay an initial entry price, recurring charges such as service charges and/or rent and a departure fee, deferred management fee or exit fee. The legal ownership of accommodation and relevant legislation can have important consequences for: Security of tenure and inclusion of the asset in the customer s estate Stamp duty (depending on state/territory) Responsibility for refurbishment and capital replacement costs Fees Ownership structures include: Long-term lease or license structures that require an up-front capital payment (commonly operated by a not-for-profit charity or religious organisation). Also called donor funded accommodation. Direct ownership such as freehold, strata title or community title. Indirect ownership such as shares in a company or units in a unit trust. Direct and indirect ownership structures are also called resident funded accommodation. Manufactured home (for example a caravan or mobile home) with a lease or license to occupy a site and possibly a lease/license for the mobile home itself. Conventional leases that involve regular rent instead of an up-front capital payment. Very broadly, the comparable characteristics are: Characteristic Highest Middle Lowest Security of tenure Strata & freehold title Lease License Upfront entry price Strata & freehold title Lease License Ongoing costs (specific to each property)* Exit fees (including sharing capital gains/ losses) License, strata freehold title Separate freehold title Lease License Lease Strata, freehold title Stamp duty Strata & freehold title Lease License * Freehold owners are usually required to contribute to a sinking fund to meet capital replacement costs. The entry contribution (EC) for a retirement village is the amount paid for the right to live in the accommodation generally, the upfront entry price but not the ongoing costs or exit fees. Unlike a granny flat, there is no separate assessment of a reasonable amount to pay for a retirement village. As outlined above, home ownership status is determined by comparing the EC and the EAA. Usually, an outgoing resident of a retirement village will be exempt from any CGT on a strata or freehold title under the main resident CGT exemption. However, a customer can only claim one property for the main residence CGT exemption. If the customer retains their former home this will no longer be CGT exempt from the time they entered the retirement village. Further, that former home will be assessable under the age pension asset test; any rent will be included in the income test but the former home isn t deemed. Future needs and family politics Although customers have a strong preference for in-home care, for many there may come a time when residential care is the only practical option. Retirement villages usually have strict limits about who can occupy or rent the accommodation. Thus the only way to fund a residential accommodation payment may be for the customer to sell their retirement village accommodation. Funding a residential care accommodation payment can be even more difficult for granny flats as it typically can t be sold separately from the main property and may not be suitable for renting to strangers. Further, the means test for an accommodation payment (after 1 July 2014) includes the capped amount of the customer s home ($144,500 as at 2012). Thus, if the customer is assessed as a home owner, the cap value of the granny flat may be included in the means test even though it is not practical to sell it. Granny flats and some forms of retirement villages can be particularly difficult for estate planning purposes. The examples above include the transfer of the former home to the customer s adult child/carer to establish a granny flat. This takes the former home out of the customer s estate. Other potential beneficiaries of the estate may have strong objections to the transfer of such a substantial growth asset even if the recipient becomes the customer s primary carer. Similarly, depending on the ownership structure of the retirement village, the property may still be part of the estate. However, exit fees may include a share of any capital gain which is more likely to increase the longer the customer remains a resident of the village. If considering moving into a granny flat, it may be appropriate for a customer to consider a family trust to hold the former home on behalf of all beneficiaries, provided the customer or their spouse does not control the trust. This can trigger the reasonable amount assessment of the value of the granny flat, potentially resulting in deprived assets or affecting the customer s home ownership status for age pension purposes. Each customer s circumstance will be unique and it s difficult to summarise all possible scenarios. When giving advice on moving to a special residence, advisers will face a wide variety of complex financial circumstances. In addition, advisers should be aware of the customer s estate plans, likely needs for residential care and wider family circumstances and expectations. Although customers have a strong preference for in-home care, for many there may come a time when residential care is the only practical option. THE AUSTRALIAN JOURNAL OF Financial PLANNING

5 42 Important Information This information has been prepared by Bendigo Financial Planning Ltd (ABN AFSL ), a subsidiary of Bendigo and Adelaide Bank Limited (ABN , AFSL ). Any views expressed in this document are the views of the author solely and may not represent the views of the broader Bendigo and Adelaide Bank Group. It is provided as general information and must not be relied on as a substitute for financial planning, legal, tax or other professional advice. The information is given in good faith and has been derived from sources believed to be accurate at its issue date. It should not be considered a comprehensive statement on any matter nor relied upon as such. Bendigo Financial Planning (including its related entities, employees and directors) does not give any warranty of reliability or accuracy or accept any responsibility arising in any way including by reason of negligence for errors or omissions in the information contained in this communication. THE AUSTRALIAN JOURNAL OF Financial PLANNING