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Are you a Couple Receiving an Aged Pension? Careful Estate Planning is Required!

Date:
By Ross Mason

 

You own your own home and have some other investments, but rely on the aged pension to meet your day to day living expenses.   Not to mention the other benefits you receive from receiving a pension (even a small part pension), which can add up to a sizeable saving each year (in discounts on PBS Medicines, council rates and other expenses).

Have you planned for what will happen when one of you passes away?  I know this isn’t something you really want to think about, but it is important to consider the financial impact on you when this occurs.  In particular, you need to consider the impact on your pension.

The Problem

Recently, I have seen a number of couples who rely on a part pension for their day to day living expenses.  When undertaking their estate planning, it became apparent that leaving everything to the surviving spouse (what you might describe as the normal Will that most married couples make) would leave the surviving spouse with too many assets to receive a pension.   The loss of any form of pension would not only reduce the income into the household, but would increase the expenses of the surviving spouse (through the loss of benefits).

OK so some detail to illustrate the problem … when assessing the amount of aged pension a person receives, the Department of Human Resources (I still struggle to get used to that name) uses an Asset Test and an Income Test.  In the Asset Test, the Department calculates the value of the person’s “assessable assets”.  You can read about this in more detail on the Department’s website (https://www.humanservices.gov.au/individuals/enablers/assets/30621).   In summary, your principal place of residence is not included in the asset test, but most other assets are.

The current Asset Test Limits (as at 1 July 2018) for homeowners are:

 

For a Full Pension

For a Part Pension

  Single

$258,500

$564,000

  Couple, combined

$387,500

$848,000

  Couple, separated due to illness, combined

$387,500

$998,500

  Couple, 1 partner eligible, combined

$387,500

$848,000

 

There are different Asset Test Limits for non-homeowners, but the same risk of loss of pension arises.

The Risk & Financial Impact

From the table above, you can see that there is a risk of loss of full pension for couples with combined assessable assets between $258,500 and $387,500.  There is also a risk of loss of any pension for couples with combined assets over $564,000.    

In short, if you are a couple receiving any pension with combined assets over $258,500, you are at risk of losing some (or all) of your pension when the first of you passes away!

What Can you Do?

First and foremost, you need to obtain good advice from an estate planning lawyer who understands the problem.   You should also get financial advice, to analyse the potential impact on your finances on the loss of a pension, and the impact of adopting the solution we discuss below.

One solution available is to do a “carve out” in your Will, to ensure that the surviving spouse is only left with sufficient assets to enable them to continue to receive a pension (in full, or part).  This is done by “carving out” assets of the first spouse to pass away to your children, rather than leaving everything to the survivor.    

OK ... so this solution is not for everyone!    

There are downsides, which include:

  • The loss of the capital … by giving your children part of your assets when the first of you passes away, you no longer have that capital and the children are free to spend it as they see fit.
  • The loss of the investment earnings on the capital, meaning you no longer receive the income generated by those assets.  It is interesting to note that a couple I saw recently who did adopt the strategy worked out that, in their case, the loss of the income generated on the assets “carved out”  would be almost compensated for (within a few dollars) by the increase in their pension entitlements.  Each situation is different, so this may not apply to your circumstances.

Of course, many people will find the upside (keeping a pension and the benefits) will outweigh the downsides.

Estate planning is a tricky area.  You can see from the above that there are hidden risks, even when you think that your situation is simple.  

The first step is recognising the pension problem exists  … we do … and now you do too!!

FAQs about this Strategy

When discussing this strategy, some frequently asked questions raised are:

  1. Can’t the survivor just give away assets to their children after the first of the couple passes away?    The short answer is NO … it needs to be dealt with properly in the Will.  This is because the Centrelink gifting rules are restrictive.  The current limit is $10,000 per financial year, limited to $30,000 per five financial years.  If the total of gifts made in a financial year exceeds $10,000, the excess will be assessed as a deprived asset (and still count in the assets test).
  2. How do you deal with the changing Asset Test Limits and changing asset holdings of couples when implementing this strategy?  A well drafted provision in your Will takes into account these changes, through the use of formulas and definitions in the “carve out” provisions.
  3. Does that mean the amounts “carved out” to my children can be spent by them without input from me?  The short answer is YES.  Amounts “carved out” are inherited by the children and can be spent by them as they see fit.  Having said that, we expect that many children receiving inheritances under a “carve out” will help the survivor in the future (for example, by buying them appliances or paying for holidays for them). 
  4. Can you provide me with financial advice about this solution?  The short answer is NO.  We are not financial advisors.  If you are considering adopting this strategy, you should consider the financial implications to the surviving spouse and obtain appropriate financial advice.

How We Can Help

At Mason Lawyers, we are here to guide you through all aspects of estate planning and estate administration to make the process as easy as possible, no matter how complex your affairs are.  We are conveniently located throughout the Newcastle region with offices in Newcastle, Mayfield, Belmont, Warners Bay and Maitland.  To start your estate planning, call us today on (02) 4929 4499 to make an appointment with one of our lawyers.