Receiving an inheritance can bring mixed emotions. While it may improve your financial position, it often comes at a time when you are grieving the loss of someone close to you.
If you receive an Age Pension or another means-tested payment through Centrelink or the Department of Veterans’ Affairs (DVA), an inheritance may also affect your entitlements.
Understanding how inheritance rules work, when you need to notify the relevant department and what options are available can help you avoid unexpected changes to your payments.
Let’s look at some important considerations before making decisions about an inheritance.
When does Centrelink assess an inheritance?
If you receive a means-tested Centrelink or DVA payment, changes to your financial circumstances may need to be reported.
However, being named as a beneficiary in someone’s Will does not automatically mean your inheritance is immediately counted towards your assets.
Finalising a deceased estate can take time. The executor may need to arrange probate, pay outstanding debts, sell property and resolve other matters before distributing the estate to beneficiaries.
Generally, Centrelink does not assess your entitlement from a deceased estate until you receive the inheritance or are able to receive it. In some circumstances, the estate may take up to 12 months to finalise before further assessment is required.
Once the inheritance becomes available to you, you generally need to notify Centrelink within 14 days.
You can find more information about how Centrelink assesses assets received from a deceased estate.
How could an inheritance affect your pension?
An inheritance is generally treated as an asset rather than income for Centrelink’s means testing purposes.
However, what you do with the money can influence how it affects your entitlements.
For example, if you deposit the inheritance into a bank account, it may be assessed as a financial asset under the assets test and subject to deeming under the income test.
If you use the money to purchase property, shares or other investments, different assessment rules may apply.
Depending on the value of the inheritance and your existing financial circumstances, your pension or other benefits could be reduced or, in some cases, cease altogether.
An inheritance may also affect your aged care contributions and fees, depending on your circumstances and the applicable aged care arrangements.
You can find further information about the Age Pension income and assets tests through Services Australia.
Can you give your inheritance to someone else?
You may decide that you do not need the inheritance and would prefer the money to go directly to your children or grandchildren.
While this may seem like a generous decision, it is important to understand how Centrelink’s gifting and deprivation rules work before giving away your entitlement.
If you waive your right to an inheritance, ask the executor to distribute your share to someone else or give away the inheritance after receiving it, Centrelink may treat this as a deprived asset.
This means you could still have the value of the inheritance counted towards your assets for up to five years, even though you no longer have access to the money.
Under the general gifting rules, you can give away up to $10,000 in one financial year, subject to a combined limit of $30,000 over a rolling five-year period. Amounts above these limits may continue to be counted as assets and deemed to earn income for five years.
The rules can be particularly important when an inheritance is involved, as simply refusing the money does not necessarily prevent it from affecting your pension.
For more information, see Services Australia’s guidance on how gifting can affect your payment or the Department of Veterans’ Affairs guidance on giving away income or assets.
An example
Harriet is a widow receiving a part Age Pension. Her mother passes away and leaves her an inheritance.
Harriet is financially comfortable and would prefer the money to go to her children, who have mortgages and young families.
She considers giving up her inheritance so the executor can distribute her share directly to her children.
However, under Centrelink’s deprivation rules, this could be treated as gifting. The value of the inheritance may still be counted towards Harriet’s assets for up to five years, potentially reducing her pension even though she never receives the money.
A different estate planning approach may have been possible if Harriet’s mother had discussed her wishes with the family and obtained appropriate legal and financial advice when preparing her Will.
This highlights why planning ahead can be so important. Decisions about how an estate is distributed can have consequences for the financial position of family members receiving government benefits.
What happens when your spouse dies?
The death of a spouse can also affect Centrelink or DVA entitlements, even if the surviving partner does not receive a substantial inheritance.
This is because your circumstances change from being assessed as a couple to being assessed as a single person.
While the maximum single Age Pension rate is higher than the rate paid to each member of a couple, the income and asset thresholds also change.
Jointly owned assets may transfer to the surviving partner, while other assets may form part of the deceased person’s estate. These changes can affect how your financial position is assessed.
For example, taking full ownership of assets previously shared as a couple may result in a change to your pension entitlement.
It is also important to consider whether you may be eligible for a bereavement payment or other support following your partner’s death.
The Services Australia guide to what happens to your Age Pension when your partner dies explains how your income and assets are reassessed.
Understanding these changes can help you prepare for the financial adjustments that may follow the loss of a spouse.
Could an inheritance affect your aged care fees?
If you or a family member receives aged care services, an inheritance may also affect the financial contribution you are required to make.
Aged care costs are influenced by an individual’s financial circumstances, including their income and assets.
Receiving an inheritance may change your financial assessment and could affect certain aged care contributions or fees, depending on your circumstances and the applicable arrangements.
This is particularly important if you are considering entering residential aged care or are already receiving care services.
Before making decisions about an inheritance, it is worth understanding how the money could affect your ongoing care costs and financial position.
You can find further information about aged care costs, fees and financial assessments through My Aged Care.
Planning ahead can make a difference
An inheritance can affect much more than your bank balance. It may change your Centrelink or DVA payments, aged care costs and overall financial position.
Importantly, some decisions are difficult to reverse once someone has passed away.
If you are expecting an inheritance, considering giving money to family members or preparing your own estate plan, seeking professional advice early can help you understand the potential consequences.
Good estate planning can help you consider how your assets will be distributed, how this may affect your beneficiaries and whether there are alternative arrangements worth exploring.
It is also worth remembering that receiving an inheritance does not automatically mean you will lose your pension. The outcome will depend on your individual circumstances, the value of the inheritance and how your assets are assessed.
Taking the time to understand your options can help you make informed decisions for yourself and your family.
Need help understanding your options?
Inheritance, Centrelink entitlements and estate planning can involve a number of complex considerations.
At Holzworth Partners, we can help you understand how changes to your financial circumstances may affect your retirement plans and identify options worth exploring.
If you have recently received an inheritance, are expecting one or would like to review your estate planning arrangements, our team can help you understand the financial implications and discuss your next steps.
The information in this article is prepared for general information purposes only and does not constitute personal financial, taxation, legal or Centrelink advice.
The information has been prepared based on our understanding of the relevant legislation and regulations at the time of publication. While every care has been taken to ensure accuracy, no representation or warranty is made as to the accuracy, completeness or currency of the information.
The information does not take into account your individual objectives, financial situation or needs. Before making any financial or estate planning decisions, you should consider whether the information is appropriate for your personal circumstances and seek advice from a suitably qualified financial adviser, registered tax agent or legal professional where appropriate.
Centrelink, DVA and aged care rules are subject to change, and individual circumstances may result in different outcomes.
