Handling an inheritance

Will Steve lose his pension?

This week we received a question from Steve who is due to inherit a sizable amount of money. But he’s worried that this will be to the detriment of his part Age Pension entitlement.

Here’s what he asked us.

Steve:

Hi, I’m a 68 year old widower, on a part Age Pension.

My mother passed away a fortnight ago and my understanding is that I will eventually inherit her entire savings ($260,000). As I’m an only child, I assume I will get the lot. And I’m now worried that this amount will push me off the pension. What should I do?

There’s a lot in Steve’s question.

The departure of any loved one is particularly painful and it’s clearly important, as an only child, for Steve to be supported and cared for by those around him. He tells us that he is managing as well as can be expected, as his mother was suffering from dementia for a number of years, and he has had time to start saying goodbye.

The second, important understanding is that when someone dies, it takes time for the legal procedures to process any bequests. Simple wills are quicker to process, but it can take six months or so from the granting of probate (or letter of administration) for the funds to be released. So Steve has some time to think through the way he wishes to manage the money left to him by his mother.

Next we asked him to share an assets and income snapshot so we could better understand the levers he has at his disposal in managing this inheritance. We also asked the value of his home (even though it is exempt from the income and assets tests) as well as any mortgage he may have. He mentioned that his bathroom and kitchen are long overdue for a renovation and that his car will need replacing sooner rather than later. In fact, understanding which assets are deemable was high on his list of questions.

• Income will be deemed on these assets

The additional $260,000 means that Steve’s assets could increase to $680,000 which is above the disqualifying assets threshold for single homeowners of $609,250. This means Steve could lose all his Age Pension entitlements including the Pension Concession Card.

Considerations

Whilst receiving a significant financial boost can be helpful, there are many ways to manage these funds. Knowing ALL the rules is critical so that the money is used in the most advantageous way. The following factors will all need to be considered by Steve before he commits to any course of action.

How much is he dealing with?

Steve won’t know if he will inherit  the full amount of $260,000 until the inheritance is received, as there may be claims on his mother’s estate about which he is unaware. So final decisions on how he will act will need to be confirmed when he actually receives the bequest.

As it is a lump sum, he will need to advise Centrelink within 14 days of receipt of these funds.

Exempt assets

There are no Centrelink repercussions if Steve spends some of this money on exempt assets, which include:

• his mortgage
• home renovations
• certain medical equipment

This will only be a problem if he buys new assets (e.g. if he buys a new car). that therefore will need to be declared or if he improves the value of an assessable asset.

Other investments

If Steve chooses to invest in:

• bank accounts
• his super fund (past preservation) or
• investments

then these are viewed as financial assets and income will be deemed accordingly.

Gifting

Steve is also thinking about sharing some of his mother’s bequest with his two sons. He needs to be aware, however, that this will be subject to Centrelink gifting rules and knowing the limits can help him to avoid reducing his entitlements needlessly.

Next steps

There’s a lot for Steve to think about here. As we’ve noted, he now has a few months to work through all the pros and cons of the various ways to manage this money. Simply spending the inheritance so as to meet Centrelink assets thresholds is not necessarily a good strategy, as he may earn only a few dollars a fortnight without having made the most of this money.

There may be other ways of combining a reduction in his mortgage (thus saving interest), completing some home renovations and the purchase of a newer car and still keep his entitlement.

We’ve suggested that he talk further with an adviser who can map out alternative scenarios for him to evaluate.

And a cautionary note

If you have an elderly parent who is speaking to you about leaving a bequest, then you may wish to think about whether you want this inheritance or if you would prefer it redirected (either wholly or partly) to grandchildren so that you don’t get a gifting penalty when sharing this money after your parent has passed away.

Managing significant bequests is a complex task, particularly when there are Centrelink entitlements at stake. Seeking both financial advice and estate planning advice or information is always a good start.

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This article is provided by Retirement Essentials Representative Number: 001260855.  We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859.  This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.