Thinking of lending your parents money for aged care? Check this first

When a parent moves into residential aged care, it’s common for adult children to want to help out financially. The Refundable Accommodation Deposit (RAD) is normally hundreds of thousands of dollars, so lending money to Mum or Dad can seem like a practical solution.

Additionally, paying the RAD avoids Daily Accommodation Payments, which are currently calculated at 7.96 per cent per annum on any unpaid accommodation balance (and indexed over time).

It can also take pressure off selling the family home, which often has significant emotional value for both the resident and their family. Lending the money can seem like a practical way to reduce costs and providing peace of mind.

Recently, I wrote about lending money between spouses. Lending money to a parent to pay a RAD can have more adverse consequences that many families don’t anticipate. The first issue is that paying a RAD can actually increase a resident’s means-tested fees.

Many people assume that because the money has been borrowed, it won’t be assessed. Unfortunately, aged care means testing doesn’t work that way. The RAD is counted as an assessable asset regardless of where the money came from.

As a result, paying a RAD with money borrowed from children can increase the resident’s assessable assets and lead to higher means-tested contributions. Families can find themselves in the unusual situation where lending money to reduce one aged care cost simply increases another.

The second issue is that the entire RAD won’t be refunded. Since November 1, 2025, accommodation deposits are subject to retention amounts. Providers retain 2 per cent of the RAD each year for up to five years, so a resident who remains in care for five years can lose 10 per cent of the deposit. On a $750,000 RAD, that’s nearly $75,000 that won’t be returned.

Most children don’t charge interest but expect to receive the full amount back, so the retention fee can create an unexpected shortfall. If the family has not discussed how any retained amount will be treated, disputes can arise about who ultimately bears the loss.

The third and potentially biggest issue is estate planning. The RAD is refunded to the resident or, if they have passed away, to their estate. If there is no agreement the question will be: Was the money a gift or a loan?

If there is no loan agreement, other beneficiaries may argue that the contribution was simply a gift. The refunded RAD may then form part of the estate and be distributed among all beneficiaries according to the will. The child who paid the RAD may find themselves arguing with siblings over money they believed would be returned to them.

The lesson is simple. Lending money to a parent for aged care is not just a family arrangement. It is a financial, legal and estate planning decision. Before you pay your parents RAD, make sure you understand how it will affect their aged care fees, how much will be refunded and how the money will be treated when the estate is eventually administered.

A written agreement and specialist aged care advice can help avoid costly surprises and family disputes later on.

Rachel Lane is the author of Downsizing Made Simple, a book and website aimed at demystifying downsizing.

• Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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