When an Inheritance Affects the Age Pension: Why Good Estate Planning Looks Beyond the Beneficiary

Leaving an inheritance to a loved one is usually intended to improve their financial position. But what happens when the person receiving that inheritance is an Age Pension recipient?

An inheritance can affect a beneficiary’s entitlement to the Age Pension because Centrelink applies income and assets tests when determining eligibility and the rate of pension payable. Receiving a substantial sum of money, an investment or an interest in property can therefore affect a beneficiary’s Age Pension entitlement, sometimes in ways that neither the Willmaker nor the beneficiary anticipated.

The issue can become more complicated if the beneficiary decides to give some or all of their inheritance to their own children. Centrelink’s gifting rules mean that simply passing inherited wealth on does not necessarily remove it from the beneficiary’s assessable assets.

For families undertaking estate planning, this is a useful reminder that a good estate plan should consider not only what you intend to leave, but who will receive it and what receiving it may mean for them.

An Inheritance Can Change a Pensioner’s Financial Position

An inheritance is not necessarily treated as income for Age Pension purposes simply because it is received. However, what a beneficiary inherits, and what they subsequently do with it, can affect the Centrelink means tests.

For example, inherited cash held in a bank account may form part of a pensioner’s assessable assets and may also be subject to Centrelink’s deeming rules. Shares, investment properties and other inherited assets can also affect a person’s financial position for social security purposes.

Depending on the beneficiary’s circumstances and the value and nature of the inheritance, the Age Pension may be reduced or cease.

That does not necessarily mean receiving the inheritance has made the beneficiary financially worse off. An inheritance may leave a person substantially better placed even if their pension entitlement changes. The important point is that the consequences of an inheritance should be understood before decisions are made about the inherited assets.

Why Can’t a Pensioner Simply Give the Inheritance to Their Children?

This is where families can be caught by rules they did not know existed.

A pensioner who receives an inheritance may decide that they do not need all of it and would prefer to help their children or grandchildren. However, Centrelink has rules concerning the amount a person can give away without the excess continuing to be treated as an assessable asset.

Under the current gifting rules, a person or couple can generally gift up to $10,000 in one financial year, subject to a maximum of $30,000 over five financial years.

Where gifts exceed the applicable limits, the excess may continue to be treated as an assessable asset for five years from the date of the gift. This is commonly referred to as deprivation.

In other words, a beneficiary cannot necessarily receive a large inheritance, immediately give it to their children (or others) and expect Centrelink to assess them as though they had never received or retained that inheritance.

This is one reason professional advice should be obtained before making substantial gifts, particularly where the intended beneficiary receives means-tested government benefits.

Estate Planning Should Consider the Beneficiary

Traditionally, conversations about estate planning tend to focus on questions such as who should receive the estate, who should be appointed executor and whether particular assets should go to particular beneficiaries.

Those questions remain important. But increasingly, effective estate planning also requires an understanding of the circumstances in which beneficiaries are likely to receive an inheritance.

Consider parents whose adult children are approaching or already beyond Age Pension age. Their Will may simply divide the estate equally between those children. That may remain entirely appropriate, but the parents may wish to understand the potential consequences before confirming that structure.

Other circumstances can also warrant closer consideration. A beneficiary may be financially vulnerable, have a disability, be experiencing relationship difficulties, operate a business or face other risks that make an outright inheritance less straightforward than it first appears.

Estate planning is therefore not merely an exercise in dividing assets into percentages. The structure through which wealth passes can sometimes be as important as the amount being left.

Should an Inheritance Skip a Generation?

Some parents consider leaving part of their estate directly to grandchildren rather than leaving everything to their adult children.

There can be legitimate reasons for doing so. For example, a parent may wish to provide directly for grandchildren while also considering the financial circumstances of an adult child who is receiving the Age Pension.

However, “skipping a generation” should not be treated as a universal solution to Centrelink means testing.

Consideration should be given to tax consequences and potential estate claims.

The circumstances of grandchildren also need consideration. Their age, capacity to manage an inheritance, relationship circumstances and intended use of the funds may all influence whether a direct gift is appropriate.

The objective should not simply be to preserve a pension entitlement at all costs. It should be to develop an estate plan that appropriately records the Willmaker’s intentions while taking account of the circumstances of the people they wish to benefit.

Could a Testamentary Trust Help?

A Testamentary Trust is a structure that should be considered as part of an estate plan.

Rather than a beneficiary necessarily receiving their inheritance outright, a Will can establish a trust that comes into existence following the Willmaker’s death. Depending on how it is drafted and administered, a Testamentary Trust can provide flexibility around the control and distribution of inherited assets.

Testamentary Trusts can be useful in a range of circumstances, including where asset protection, taxation, vulnerable beneficiaries or intergenerational wealth planning are relevant considerations.

However, a Testamentary Trust should not be assumed to make inherited wealth invisible to Centrelink. Social security treatment can depend on the terms of the trust and the beneficiary’s control over, and relationship with, the trust and its assets.

If Centrelink considerations form part of the reason for establishing a Testamentary Trust, coordinated legal and financial advice is particularly important.

Why Acting Before the Inheritance Is Received Matters

Once someone has died, the options available to their family may be considerably more limited.

A beneficiary cannot simply rewrite the deceased person’s Will because another estate planning structure would now produce a preferable financial outcome. Although there can be circumstances in which beneficiaries alter how an estate is distributed, including through a deed of family arrangement, doing so can have legal, taxation, social security and other consequences and requires careful advice.

By contrast, reviewing an estate plan during the Willmaker’s lifetime provides an opportunity to consider these issues deliberately.

That might involve discussing questions such as:

Are any intended beneficiaries receiving the Age Pension or another means-tested benefit?
Are adult children likely to be retired by the time they inherit?
Is an outright inheritance appropriate for each beneficiary?
Is there a reason to provide separately for grandchildren?
Would Testamentary Trusts serve a genuine estate planning purpose?
Are there tax, superannuation or family provision considerations that need to be addressed?

These questions do not necessarily require a complicated estate plan. Sometimes straightforward arrangements remain the best ones. The value lies in making an informed decision with an understanding of the consequences.

Estate Planning Is Increasingly Intergenerational

Australia is in the midst of a substantial transfer of wealth between generations. At the same time, people are living longer, children are often well into adulthood when their parents die, and it is increasingly common for an inheritance to be received during or close to retirement.

That changes the context in which estate planning and the passing of wealth take place.

For some families, the conversation is no longer, “Who should inherit my estate?” It is also, “What will receiving this inheritance mean for them?”

There is rarely a single structure that is right for every family. Age Pension entitlements should also not be considered in isolation from a beneficiary’s broader financial security, asset protection, taxation position, aged care needs and personal circumstances.

The purpose of careful estate planning is to identify these issues early enough to make informed decisions.

If your Will was prepared some years ago, or the circumstances of your children and other beneficiaries have changed, it may be worth reviewing your estate plan with those circumstances in mind.