A beneficiary’s interest in a deceased estate will generally be assessed for social security purposes when the interest is received or is able to be received.
Centrelink and the Department of Veterans’ Affairs (DVA) will usually allow up to 12 months from the date of death of the testator for the estate to be finalised and the assets to be distributed.
This period may be extended should there be delays in finalising the estate, provided the delays are outside the control of the beneficiary or there are extenuating circumstances.
Should the delay be due to the actions of the beneficiary, Centrelink/DVA may assess the interest as being able to be received and therefore assessable under the income and/or assets tests.
Method of assessment
Assets that are received by way of an inheritance are not treated as income for social security purposes, even where the assets are received as instalment payments.
This is because an inheritance is considered to be a one-off entitlement.
Assets received as part of an inheritance will be assessed in accordance with the general rules for assessing assets, for example, financial investments are assets and deemed, personal effects are assets only, and so on.
Effect of forgoing entitlement
Where a social security income support recipient forgoes an entitlement to an interest from a deceased estate, the deprivation provisions may be triggered.
Deprivation may also apply in this instance even if the person dies intestate, provided there is a legal entitlement to the estate’s assets.
Deprivation cannot be avoided by simply instructing the executor to distribute their interest directly to another person.
The deprivation provisions will be triggered where a person does not receive adequate financial consideration and the following applies:
n the person waives their right to their interest in the deceased estate; or
n directs the executor to distribute their interest in the deceased estate to a third party; or
n gifts or transfers their interest in the deceased estate to a third party after the estate has been finalised.
The date of disposal will usually be from the time the interest was waived or gifted, or the time the person would have been able to receive the interest.
Where a person instructs the executor of the will to distribute their interest to a third party, the date of disposal will be the later of the time the person instructed the executor or when the person would have been able to receive their interest in the estate.
Life interest in a deceased estate
The value of a life interest is generally exempt under the assets test unless it was created by the individual, their spouse or on the death of their spouse.
A person who has a life interest in their principal home will be treated as a homeowner for assets test purposes as it is considered the person has reasonable security of tenure.
The home would be assets test exempt as is the case where the home is directly owned.
In some cases, a person may have a remainder interest in an estate asset.
For example, it is called a remainder interest where the titleholder of a property does not gain any benefit in their interest in that property until another person’s interest ceases.
Remainder interests are not assessable until the interest is received.
Assessment of income
The income from a life interest will be assessable under the income test. However, the income cannot be assessed until probate is granted or the income is actually received.
The income received will be assessable for social security purposes (the assessable amount is usually the same amount shown on the individual’s tax return).
Example
Herman, an age pensioner, is a beneficiary of a testamentary trust (created on the death of his mother) in which he has a life interest in the income from an investment property.
His son Eddy, who receives a disability support pension, has a remainder interest, that is, ownership and control of the investment property will go to Eddy on Herman’s death.
The amount paid (after expenses) to Herman from the rental income received will be assessed under the income test.
No assets will be assessed. Eddy will not be assessed with any income or assets.
However, when Herman dies, the income and asset value of the property will be assessed against Eddy unless the property becomes his principal home.
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Mary is a 72-year-old widowed age pensioner who owns her home. Mary’s uncle Sam has recently passed away and Mary has been nominated as the sole beneficiary of his estate. The estate includes a $500,000 home, $300,000 in bank deposits and a $70,000 Mercedes.
Mary has asked the executor of Sam’s estate to distribute the home and the investments equally between her three children. However, Mary will accept the Mercedes to replace her existing 1988 Toyota Camry.
Should Mary decide to forgo her inheritance in favour of her children, there are some important social security implications to consider.
Forgoing an inheritance will usually result in the application of the social security deprivation provisions.
So in Mary’s case, $790,000 (ie, $500,000 + $300,000 less the $10,000 gifting allowance) will be assessed as an asset and deemed for five years.
This will result in the cancellation of Mary’s age pension. However, Mary may still be entitled to claim the Commonwealth Seniors Health Card if her adjusted taxable income is below $50,000 per annum.
On the other hand, had Mary decided to accept all the assets, she would still have lost her age pension, but she would be in a position to make up lost income by selling or renting the home and investing the $300,000.
An alternative option could be to forgo only part of the estate. For example, Mary could forgo the $500,000 home and accept all or part of the $300,000 in bank deposits. While Mary would still lose her age pension because of the assets test, she would have adequate funds to cover any decrease in her income.
On the other hand, had Mary discussed her wishes with Sam prior to his death, Mary could have asked Sam to nominate her children as the main beneficiaries to his estate, thereby avoiding any future adverse social security implications. There are no social security restrictions on who can be nominated as beneficiary to an estate.
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George Avramides is a technical manager at ING Australia.
