In a previous article, we discussed the potential benefits of either buying or selling a family home. In this post, we introduce some of the key factors to keep in mind when making the decision about what to do with your family home.
For many, if not most, older people, the family home is typically the major asset that they own. In cases where a person may have retired with substantial super, these benefits have often been drawn down by the time an aged care facility looms.
For example, according to the Australian Institute of Health and Wellbeing, only 8.7% of residents of aged care facilities are self-funded retirees. The overwhelming majority claim either a DVA or a Centrelink pension. This tells us that these residents have relatively few assets outside the family home (which is exempt from the assets test for these benefits).
Accordingly, the decision regarding the family home will often be the most significant decision that you are likely to make (or have made on your behalf).
One of the most difficult factors in deciding whether you should retain a family home is the fact that you do not know how long you will be in the aged care facility.
According to the Australian Institute of Health and Wellbeing, the average length of stay in an aged are facility, as of 2011, was around 145 weeks. This is just short of three years. Stays were shorter than this for men and longer for women (and 70% of residents are women).
145 weeks is simply an average. There is substantial variation around that number. 27.1% of people stayed for less than two years, while 20.5% of residents stayed for more than five years (this figure was slightly higher in major cities).
So, relatively long stays in aged care facilities are common: 1 in 5 people who enter residential aged care are still there 5 years later. The system takes this fact into account in various ways. One is the lifetime cap on the means tested care fee payable by residents. This fee is capped at about two and a half years’ worth for life. Another is the fact that the Refundable Accommodation Deposit does not increase once a resident has moved into a facility.
Residents using debt, such as a reverse mortgage, to pay some or all of the costs of aged care may find that the amount of debt starts to approach the limits of the loan facility as the years pass. Simple investment analysis tells us that the net equity in the home should not be affected, as long as the growth rate on the home keeps track with long-term averages. But growth can be lumpy, and so a plan for what happens if the debt starts to approach its limit makes sense.
The best plan, of course, is to minimise the amount borrowed.
Obviously, prudential financial planning dictates that longer stays in residential care be assumed.
A protected person is someone whose continued presence in a home after the owner (or co-owner) moves into residential care has the effect of exempting the home from the assets tests that apply to aged care. There are four categories of protected person. These are:
The presence of a protected person means that the value of the family home is not counted towards the assets test for either the means tested care fee or the accommodation fees. In most cases, then, where a protected person remains in the family home, there is an economic rationale for keeping the family home.
Not to mention the fact that the protected person still needs somewhere to live!
Where there is no protected person, the decision as to whether to keep the family home becomes just that: a decision. You need simply to decide whether and how to keep or dispose of the family home.
One issue that is often worth keeping in mind is that the principal place of residence CGT exemption that applies to a family home continues for up to six years after you leave that home, as long as you do not claim another principal place of residence.
In addition, where a principal place of residence forms part of a deceased estate, then there is a two year period following the death of the owner during which the CGT exemption continues to apply.
What this means is that the CGT-free status of a family home can continue for up to six years following the owner’s entry into an aged care facility.
Alternative uses of the proceeds of any sale of the family home need to be weighed against this feature of the family home.
You can read more about the family home and aged care in our ebook, which you can download from the ebook section of this website.
