As my work involves the crossover of Centrelink and Estates a common referral I receive is someone seeking advice on how to retain their pension, and defer their inheritance to their grandchildren or other family members.
In today's blog, we will lightly cover how you can alter your inheritance and how Centrelink assesses these changes.
Reasons Why Someone May Wish to Reduce Their Inheritance
A will specifies how someone's assets should be distributed once they pass. These wishes may not necessarily consider the beneficiaries' exact situations but aim to help as the testator sees fit. Beneficiaries may feel they received too much inheritance or simply don't need it, and wish to alter the allocation.
Here are a few examples:
Balancing Allocations: A sibling or step-sibling was left out or had an unequal distribution, and the other beneficiaries want to balance the allocation.
Comfortable Situations: The beneficiary is comfortable with their current situation and wants others, like grandchildren or siblings, to benefit more.
Retaining Government Benefits: The beneficiary doesn’t want to lose government benefits due to the variability of outcomes or a sense of entitlement to the pension.
The reasons don’t have to be rational or economic and can often be driven by personal life experiences or biases.
Can Someone Reduce Their Inheritance?
Disclaimer: I am not an Estate Lawyer. The following information provides context to the Centrelink implications.
There are several ways to alter the allocation of a will after someone has passed away.
Zinta Harris of Resolve Estate Law categorizes these options as follows:
You can learn more about these options through a course she offers. Visit her website here
All options, including the “kitchen table” agreement should be documented by the parties in a deed. The deeds go by different names (depending on the lawyer and contents of the deed) but they are often called Deed of Family Arrangement. The only outcome that is not recorded in a Deed would be where the court determines the outcome as this is recorded in a Court Order.
It is also important to make the distinction that there can be estate disputes and litigation that are different from the above. These could include questions of
Was the will valid?
Was there undue influence or coercion?
What does the construction of a particular clause mean and how should it be interpreted?
What is the relationship of a person to the deceased (especially important in intestacy)?
Some of these matters are inappropriate for parties to settle between themselves as it is more properly the jurisdiction of the court to determine.
Deprived Assets and Centrelink
The concept of deprived assets/income is crucial. A deprived asset is an asset disposed of for nil or less than its value. Examples include:
Large Gift of Cash: Grandma gives $100,000 to Grandson. This full amount is considered a deprived asset (less the Allowance Free Disposal Area).
Selling a House at Lower Value: Grandma sells a unit worth $800,000 to Grandson for $400,000. The difference of $400,000 is regarded as a deprived asset (less the Allowance Free Disposal Area).
Where an asset is ‘Deprived’ it is counted in the Centrelink assessment (Asset and Income tests) for the next 5 years, and then is removed. The deprivation value stays the same even if the value of the asset given changes (eg The Grandson above spends that $100,000).
Gifting and Centrelink Rules
Gifting rules are often misunderstood. While you can only give $10,000 a year or $30,000 over a rolling 5-year period without it being considered deprivation. While technically true, the thought should be the other way around. This amount is known as the Allowance Disposal Free Area, and is an exemption on deprivation. There are a few other exemptions such as seen in Granny Flat Rights.
How to Minimize the Impact on Centrelink
Giving it Away doesn't work:
As per the rules above the majority of it will be counted as a deprived asset and impact your Centrelink benefits for the next 5 years, so this doesn’t really help from a Centrelink perspective in the short term.
Assuming you have made your ‘Gifts’ already, and every $100,000 could reduce your Aged Pension by $300 per fortnight for the next 5 years (if you were receiving less than the maximum).
It’s important to note that it doesn’t count as your asset until it reaches your name, so you only have to update Centrelink once you receive the funds.
Deed of Family Arrangement doesn't work:
Through an agreement as above, if all parties agree you could opt out of receiving an amount of the money, for it to go elsewhere. Because it does not hit your bank account, you may think you don’t need to notify Centrelink. This is incorrect.
The Deprivation rules still apply where the person waives their interest for no consideration, so this works the same as if you just received the money and gifted it on.
The date you will need to notify Centrelink really depends on how the person disposed of the asset but is likely either the date the interest was waived or the date they would have been able to receive the interest.
Lending the Money doesn't work:
Loans can be a perfectly valid way to provide for family members. I would always suggest getting documentation drawn up by Family Lawyers to ensure there are proper rules in place to protect you and the future health of the family dynamic.
A loan to a family member is however assessable under the asset and income tests.
Getting clever with Trusts doesn't work:
If you decide under the above situation to pass the money to a trust structure, it would either be done through you gifting that money OR the Deed of Family arrangement.
The result is the same If the trust benefits you (or Centrelink consider it to via control tests) than it's your asset If the trust does not benefit you, than the cash moved would be a deprived asset.
Spending Money to Reduce Assessable Assets
Because of the way deprivation rules work receiving an inheritance that impacts your pension will impact your pension.
The key here is that what you lose in pension you make up for in having more money! This money can be spent, and as it decreases, your Pension begins to increase or it can be invested to provide additional income and support your lifestyle, while being less dependent on the Social Security System.
For those that are on the line of losing the Pension, and it is important to retain for the discount benefits, I always suggest looking at what substantial expenses they have been putting off that would improve their lives.
Purchasing a Car: Decreases assessable assets as cars depreciate once driven off the lot.
Home Improvements: Spending on home improvements reduces assessable assets as the value increase isn't captured in the asset/income test for your Family Home.
Going on a Holiday: Reduces assessable assets as money spent on holidays isn't considered a deprived asset.
Balancing Estates via a Deed of Family Arrangement
When you are looking to balance an Estate through a Deed of Family Arrangement, it is crucial you do not ignore the flow on effect on each beneficiary that the deprivation of assets may cause.
Initially it may feel equitable, but if then one family member has a direct loss of income from Centrelink that was unaccounted for, it can create family issues.
In Closing
Centrelink has mechanisms to look through trusts and understand asset dispositions. Consider the gift from your loved one as a benefit to you and use the money to improve your life, even if it counts as a deprived asset.
If you feel the money is best given to others, ensure you consider the deprivation impact on your income.
For those on the verge of losing their pension, consider substantial expenses that improve your life and reduce assessable assets.
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