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By William Truong, Technical Services Manager
As the cost of aged care can be substantial, it is important that appropriate planning exists to navigate the process of entering, swapping and leaving an aged care facility. During this COVID-19 period, we have seen a higher level of resident exits, prompting increased levels of discussion on this topic. This article will focus on how you can assist your clients to navigate the possible financial complications of leaving an aged care facility. We discuss tips to get the refundable accommodation deposit (RAD) or refundable accommodation contribution (RAC) returned in a timely manner.
The RAD is a lump sum payment for accommodation in an aged care home. This is the price of a room, in lump sum form that you have agreed with your aged care home to pay.
The RAC is used when partial costs of aged care are covered by the government, allowing you to pay the difference as a lump sum.
The RAD and RAC is refundable upon a resident permanently leaving an aged care facility.
Both the RAD and RAC is guaranteed by the Federal Government, so can be returned through different channels if an aged care provider closes permanently due to financial difficulties.
The money from RAD or RAC is often invested or used to manage running costs, buy or build new facilities and repay debt. Aged care providers are required to manage their finances to ensure sufficient liquid assets exists to repay RADs or RACs when residents exit a facility. Residents do not earn interest on the RAD or RAC paid while they live in the aged care facility.
To pay the outgoing resident’s RAD or RAC refund, the aged care provider may be relying on incoming resident RAD or RAC payments. The COVID-19 crisis has hindered liquidity as future residents are deferring their move into aged care and thus vacancy rates within facilities may be higher than normal.
Should several residents exit a facility in a short period of time, a large amount of RAD or RAC refunds will be due in a short period. This is a trend we have seen during the COVID-19 crisis. The aged care provider may not have access to sufficient liquid assets to pay a large lump sum, so it can take some time for them to repay.
Should a RAD or RAC refund be delayed past the prescribed refund timeframe, once all the appropriate notifications have been given, interest becomes due on payments.
If a resident passes away while living at the aged care facility, the provider must refund the lump sum balance, less any allowable amounts that have been deducted over the care period, within 14 days of receiving either:
The provider may refund the lump sum balance without evidence of probate or letters of administration, if they are confident that the correct legal beneficiary has been identified, which includes citing the correct legal documents.
Practically, it may take six months or more to arrange probate. The aged care provider then has 14 days after being provided with a copy of probate or letters of administration to pay the refund.
Interest during this 14 day period is accrued at the base interest rate, based on the lowest deeming rate plus 2%, currently 2.25% at time of writing. If the provider does not pay the refund in 14 days, interest on the refund amount increases to the maximum permissible interest rate, currently 4.10% at the time of writing.
Once a resident decides to permanently leave a facility, the RAD or RAC is to be paid within 14 days from notification of departure.
In the past, interest requirements have acted as an incentive for providers to refund the RAD or RAC in a timely manner. In the current climate, providers with low liquidity levels may find this interest rate, even at the penalty rate, to be cheaper than other funding options, so may delay refunds.
In the current low interest rate environment, rates payable by the provider are likely to be higher than interest which can be earned in a bank account, so provides some compensation to exiting residents for any delays.
While the RAD or RAC is generally refunded to the person exiting care or the resident’s estate, the refund of RAD or RAC can become challenging in certain situations. For example, when other family members have paid the RAD or RAC.
Where a RAD or RAC is being paid for by someone other than the resident entering aged care, it is a good idea to have documentation in place outlining who the RAD or RAC should be refunded to, to assist in mitigating any delays. It may be possible to be named as the recipient of RAD or RAC as part of the contract when entering the aged care facility, in which case the facility can refund the RAD or RAC to that named person, accelerating the process.
Each facility will have their own procedures, so it is important to check before to making an agreement to enter an aged care contract. Each family will need to consider financial impacts of entering a facility and subsequent possible events, especially exiting. The events surrounding such key events can be difficult, so minimising financial stress can be a weight off family members or carers.
If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.
DisclaimerThe information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.