Estate Planning Issues RADs | Refundable Accommodation Deposit

As our population gets older (and lives longer), the likelihood that an elderly parent will need to go into a nursing home is increasing.

Usually this requires having to make a payment to the nursing home for the privilege of being accommodated there – either by way of a Refundable Accommodation Deposit ("RAD") or for those who are unable to come up with a lump sum contribution a Daily Accommodation Payment ("DAP").

As one might gather from its name, the RAD is refundable on the death of the person in care, or if they move out of the nursing home. The RAD in this sense is effectively an interest free loan to the nursing home. On the person’s death, the RAD must be refunded to their deceased estate within 14 days of a grant of probate or of letters of administration. Interest is payable for this period, with a higher rate applicable if that time is exceeded. Alternatively if the person changes facilities, 14 days’ notice must be provided, and then the RAD (again with interest) must be paid back to the person in order to pay the RAD for the new nursing home.

On the other hand, the DAP is not refundable, since it is akin to paying a daily rent. It applies if no RAD is paid, or if the RAD sought by the nursing home is only partly paid (so that the DAP is based on the unpaid balance of the RAD). Where a combination of a partly paid RAD and paying a DAP is involved, it can be agreed that the DAP be paid out of the RAD (e.g. for cashflow reasons) – although this will mean that the RAD (and therefore any amount that will be repaid to the person’s estate after they die) will decrease over time, whilst the DAP will correspondingly increase over time.

Paying for the RAD

Often when a sole parent needs to go into a nursing home and they own their own home, the home is sold into order to use the proceeds of sale to pay for the RAD. Any excess proceeds (and any other assets) can be invested so as to pay for any other ongoing costs of care (and possibly also to pay a DAP if that option is taken).

However, sometimes the home is not sold. This may be for a number of reasons, including:

•    The parent is hoping that their stay in the nursing home is only temporary, so that they will eventually move back home when they get better;

•    Often the home is the only valuable asset that the parent has, and (particularly in recent years in capital cities) one which usually increases in value, as compared to the “interest free loan” that is the RAD;

•    The parent wishes to preserve the home as an inheritance for the benefit of their children when they die.

Or it may even be the case that there is no home to sell, as the parent may have been living with one of their children at their home or in a granny flat on the children’s property.

In this case, it may be that one of their children will pay for the RAD, on the assumption that after the parent leaves the accommodation (by reason of death or otherwise) they will eventually get their money back.

Estate Planning Issues

However, there are a number of important issues that need to be considered, which otherwise might throw a spanner in the works, such as:

What if the parent’s will fails to recognise the payment of the RAD made by their child?

Given that the RAD must be paid to the deceased estate of the parent on their death, and not directly back to the child who paid for it, it is essential that the parent’s will recognise the payment and deal with it separately.

For example, if the will of the parent simply divides their whole estate between their children in equal shares (and there is more than one surviving child), then the RAD will end up being split equally between all the children and will not go wholly back to the child who paid it – giving rise to unfairness and possibly a challenge to the will and a rift in the family.

What needs to be done to avoid such unpleasantness is for the parent to amend their will after the RAD is paid so as to make a specific gift of the repayment of the RAD back to the child who paid for it, and then the balance of the estate can be distributed accordingly.

Alternatively the will could have a specific “equalisation clause” that directs the executor to take the repayment of the RAD to the relevant child into account when dividing up the balance of the estate.

What if the parent leaves no valid will at all?

A similar problem arises. Under the various State and Territory Succession Acts, there are provisions that impose a “statutory order” of inheritance where a deceased person leaves no valid will (i.e. they die intestate). For instance, under section 127 of the NSW Succession Act 2006, if an intestate person leaves no surviving spouse but leaves surviving children, their children are entitled to the whole of the intestate estate, and if there are 2 or more surviving children the entitlement vests in them in equal shares.

The answer here is to put into place an appropriate will, which specifically recognises the entitlement of the relevant child to receive the repayment of the RAD from the estate.

If the parent is no longer capable of making a will (e.g. due to advanced dementia – which may have been the reason why they needed to go into a nursing home in the first place), it may be possible to have the Court approve the making of an appropriate “statutory will”, for instance under section 18 of the NSW Succession Act 2006.

What if the RAD has been used to pay a DAP?

It may be the case that the RAD was a part payment of the assessed RAD, and that due to lack of funds elsewhere the RAD was being used to fund the ongoing payment of a DAP – so that the amount ultimately paid to the deceased estate after the death of the parent is less than the amount originally paid (perhaps quite significantly less).

In this instance, the will should make a gift back to the relevant child of the amount originally paid by them, as opposed to the amount received by the estate from the nursing home.

What about possible challenges to the parent’s estate?

It may be the case that there is a significant risk of a challenge to the parent’s estate after they die, perhaps due to there being a blended family situation and / or concerns that a surviving former spouse may seek to make a claim.

In this situation it would be best for the relevant child to act like a bank – instead of making a gift of the money required to pay the RAD, the child should lend the money to the parent under a written loan agreement where the child also obtains a registered mortgage over the title to the parent’s home. That way, the child can enforce their security (just like a bank) to obtain repayment of the loan (perhaps with interest too) before unsecured creditors and family provision claimants can negotiate the rest of the estate.

If the parent did not have a home to provide as security, but they have other personal assets available (such as shares, bank or ADI accounts, cars, artwork, etc.) the lender child might instead register a security interest over them on the Personal Property Securities Register, which is a national online register administered by the Australian Financial Security Authority under the Personal Property Securities Act 2009 (Cth).

The value of seeking expert legal assistance

Our associates Townsends Lawyers have many years’ experience in both simple and sophisticated estate planning and superannuation strategies and are well-versed in all aspects of tax effective and asset protective estate planning. We are well placed to assist your clients by giving them expert and considered estate planning advice and recommendations, and creating the legal documents to ensure that they will be properly implemented when the time comes. In particular we can provide advice about the likely issues and scenarios that your clients in their specific circumstances may face, in order to try to “future proof” their wills as far as is possible; to sensitively ask your clients what they would wish to happen if the unthinkable happens to them or their loved ones; and to proactively recommend and implement in the client’s documentation strategies to ensure that their estate planning needs and objectives are appropriately met.

For a confidential discussion as to the ways in which we might be of assistance with this important service, or for more information regarding this article, please call 02 8296 2666 or email info@supercentral.com.au.

Brian Hor
Special Counsel – Estate Planning & Superannuation