Help with this scenario please.

Hello all

I realise advice cannot be given only opinions - so please feel free to offer all opinions. I am trying to clarify my thinking before obtaining advice.

Let me set the scene:

Elderly parents, father in nursing home, mother living in ppor (value approx $750k).

Cash poor asset rich - both on full aged pension + $90k in term deposit
and small allocated pension providing $900 per month. Nursing home is going to take all fathers pension plus $7k per year.

Proposal: form family trust, sell ppor to trust with mother father and 3 children as beneficiaries. Obtain LOC or cash bond to provide mother,father with income. Use $90k to pay set up costs and stamp duty.

please be full and frank(as they say) with thoughts/replies.

the reason I need to pick everyones brain is that I have to be able to "sell" the idea to a very conservative sibling and parents - so would like to be able to sound sensible. If they give thumbs up to idea then I can start to see the professionals

thanks
Jenny

Hi Jenny

Good idea to try to brainstorm some solutions. Not saying any of these ideas is necessarily the best solution...nor am I suggesting anything but entirely loving and proper motives to your proposal.

I'll give this some thought over the weekend...but here's some initial points.

1) One point of view may be: What do your Mum and Dad get out of this? It's THEIR house, they paid it off, they should have the entire benefit of it whilst they're still around.

2) Is just selling the family home an option? No doubt there's a lifetime of happy memories attached to it and a lot of emotion...but does your Mum need to be banging about in the house by herself? Perhaps a smaller apartment/townhouse near your father's nursing home would be a better option? The surplus proceeds would fund Dad's nursing home fees plus some lifestyle for a few years at least...and then maybe your mum downsizes again...to be in the home with your Dad (just speculating here)

3) Reverse mortgages are an option (an expense and inefficient one in my book, but deserve to be considered). Make sure if you think about going down this path that you ONLY go to a reputable bank of financier and that ALL they get is a mortgage and there's no SALE involved...

4) Identify exactly what the problem is. Do your parents need to find the $7kpa or do they just want more cash for lifestyle spending?

5) Looking specifically at your proposal:
The advantages:
a) sale of family home is CGT free
b) home in family trust permits flexible distribution of both the rental income and ultimate capital proceeds from sale (but will then be subject to CGT)
c) your mum and dad have a big lot of cash proceeds from the sale (but probably this money does a round robin and ends up funding the purchase by the trust (at least partly).

Disadvantages:
a) depending on who the trustee is, you mum and dad have perhaps lost control of their asset (altho that's okay if they get a market price for the sale and keep the proceeds - note comments above about round robin)
b) any interest on borrowings by the trustee to buy the home as an investment property will NOT be deductible unless your mum pays a market rent - which she probably can't afford in a $750k house
c) there may now be land tax payable on the house
d) there will be stamp duty on the sale
e) the trust involves set up costs
f) your mum and particularly your dad may not want to be bothered with all the admin hassle of the trust (although no doubt you can help them).

Just some food for thought...

Cheers
N.

Hi Jenny

Just some thoughts as I had a similar problem a few years ago.

Your parents will probably hate seeing that 90k touched....that is security.

I think they might find the whole trust idea too confusing and I agree with Nigel...it is THEIR home. From experience they get more conservative in old age. Security is terribly important.

Keep it simple.

You kids will probably be the beneficaries anyway, trust or not.

Does your mother want to move closer to your father? Maybe rent a smaller place if she is keen and see how she likes it then rent out the PPOR. Would it get a reasonable rent that would cover the shortfall in the nursing home costs?

What I did was rent out the PPOR for 2 years until Mum decided she wanted to sell. It was entirely her decision when she did so she was happy about it all.

cheers
ani

Hi Jenny,

You may want to run your scenario past Centrelink to see what affect the changes your are thinking of will have on your parents pension. The best person to talk to is a FIS (Financial Information Service) Officer.

Here is a link to a brochure which explains the service.

FIS Brochure

Hi Jenny

Been in a kind of similar situation to you, and I have parents of the mindset "I wouldn't want to do anything that might affect my pension".

I came to the conclusion it is more family-friendly to provide well-meaning advice, but at the end of the day its their house and their business, and its a long hard road converting oldies to the more aggressive or forward-planning way of thinking.

What's the real issue you're trying to address for them - lack of available income to pay the bills ? Would the interest on the $90K would nearly fund the $7K nursing home expenses ? Is the pension your Mum receives insufficient to live on ?

I guess they're in a stage of life where participating in a 'scheme' that involves debt or adventure probably doesn't suit them ?

If parents are attached to their property, could one option be to take a conservative (30-50% ?) line of credit against the property, placing the proceeds in a fund like NI ? The income earned would pay the interest, they would have surplus to fund the $7K required for Dad. Of course the oldies will probably be horrified at the idea of such debt ... I know mine were

Or maybe you go guarantor for purchase of a smaller property (if that's a need?) using the existing house as security, and rent the existing one out for a while as Ani suggested till your Mum is comfortable ? I guess then there may be CG issues but the purchase was probably pre-1985 ?

I think Muz is right - the sums would have to be done in relation to the pension entitlements etc. and the FIS sounds like a good idea.

I also think you'd ALL want to be well committed to the idea of going into the Family Trust etc before you proceed - there's risk, confusion, paperwork, admin etc - all probably way too confusing for the old's and likely time consuming for you.

Sorry - no great ideas there - I sympathise with your predicament though

Cheers
Carl

PS mine chose not to take on any of my advice and continue to live a meagre and happy existence, oblivious to any lost financial opportunity, but happy, which at the end of the day is probably all that matters.

Hi Nigel
thanks for input, I see I need to be more specific

1) The motive for forming a trust (but perhaps we dont need one) is to protect the ppor so that equity can be used to fund necessary expenses and lifestyle for parents. Parents have asked for help to organise finances into a more efficient structure.

2) Mum likes living in the house, great support from neighbours and it is very close to nursing home. I assumed that she could stay living there after sale of house to trust without paying rent???

3)Yes I had heard that reverse mortgages were not great, that is why I thought LOC or cashbond with 3 children as guarantors.

4)Identify needs - $7k needed for shortfall in annual budget of nursing home fees, pharmaceuticals, rates, telephone etc. On top of this extra income needed to fund mothers lifestyle - she is 72, physically robust, will need a new cheapie car shortly and would like an annual holiday for as long as she is active. So with $750k equity we think it should be possible for her to enjoy a more generous lifestyle. Perhaps $15kpa / 10years then review. (Hopefully by then property would have doubled again - it is in Sydney eastern subs.)

Dad quite debilitated and not able to attend to financial details. Mum would certainly not want to have any part in administering trust and has clearly asked for help.

Our broad plan was to either (a) reinvest $90k to cover basic expenses and then somehow harvest equity in ppor in a minor/sustainable way to provide mother with a life or (b) sell ppor to trust (using $90k to pay stamp duty and set up costs) and harvest equity from ppor to provide lifestyle for mother.

look forward to your thoughts

thanks
Jenny

Hi Ani - thanks for your comments.

Mum has asked us to please reorganise 90k into better investment.

Conservative - you bet! But finances are so tight and the only solution I can see it to s l o w l y harvest equity to provide some lifestyle.

Yes we three are the beneficiaries,but that is a long way off, my mother has a family history of longevity, so a long term plan is needed.

Mum wants to stay in the house and is already in close proximity to nursing home.

Jenny

Thanks Muz I'll check out that link.

Hi Tryhard

It would be great if this was just a matter of topping up a great lifestyle, but because of the way my father was assessed by centrelink his nursing home charges are high, not leaving enough for my mother to pay household expenses and live - so something has to be done. Also trying to confer with siblings who are extremely conservative

My mother would go to extremes of deprivation to keep the house and of course her pension So a solution to allow her to do both and increase a very meagre lifestyle is needed.

Perhaps a family trust is overkill??

..thanks tryhard
Jenny

Hi Jen.

I well understand part of your problem here. It's all very well finding the best 'financial solution' but unless it's something your parents are very comfortable with and understand then it's not likely to go very far.

If this was some people I know, by asking you to do something 'better' with the $90K they would be hoping there was some type of Term Deposit that you could find that may give them another 0.5-1.0%.........and nothing more! If it involved borrowing money, getting accountants involved, completing tax returns etc. then it all becomes too hard and staying where they were would be the preferable position. I'm not saying this is your situation but I'm just saying it's common.

This is obviously not a problem that is restricted to the elderly, but I guess afflicts us all at times and part of the path through this is 'financial education'. The more we learn, the more informed we become and hopefully the less fearful we feel.

I applaud the effort you're making in gathering as much of this 'information' as possible on their behalf and I wish you all the very best in the following 'presentation and education' phase.

The specifics of your situation since it involves pension entitlements etc may also be best looked at by a professional financial planner to get their opinion. Perhaps you could contact one of the Financial Planning Firms associated with this Site or get a good recommendation from other sources you may trust?

This 'problem' will undoubtedly become more common with our rapidly aging population.......

Perhaps as children, we should occasionally reduce the amount of popup toasters and coffee perculators we buy our parents as presents and possibly shout them the odd Gift Voucher to a Financial Planner or other Financial Education Course?

All the best Jen.

Hi Jenny

Just reading through some old post and am wondering where you got up to?

In regard to your plan to sell the ppor to trust. I would have thought you would create a big problem as your parents would then have $750k as assesable assets which would impact the pension as I belief anything above $250k starts eroding it.

Look forward to an update.

Cheers