Abandon a gift in a Will to keep the pension?

Abandon a gift in a Will to keep the pension?

The Financial Planner carefully structures Mary’s affairs. Mary receives a $1 pension and the much sought-after Concession Card.

All good. But then, Mary’s mother dies.

Mum’s Will leaves everything to Mary. The inheritance costs Mary her $1 pension and Concession Card. Mary has money from her superannuation. She does not want the inheritance. Mary desperately renounces the gifts under the Will. Mary’s children get the inheritance instead.

Does Mary keep her Centrelink Benefits?

Sadly, no. Centrelink deems monies abandoned or given away. They are still considered your assets for the next five years.

Can I do a Deed of Family Arrangement where Mary gives up her Mum’s inheritance?

Centrelink considers a Deed of Family Arrangement to be an abandonment.

Two Centrelink deprivation exceptions:

1. $10,000 rule – gifts under $10,000 per year are not means-tested
2. $30,000 rule – gifts under $30,000 over five years are within the gifting-free area. However, a gift cannot exceed $10,000 in any year.

Gifts above $10,000 are ‘deprived assets’. ‘Deprived assets’ are given away but still deemed yours for the next five years. Sure, Mary can abandon the gifts under her Mum’s Will. However, Centrelink deems the gifts still hers for the next five years. After five long years, Centrelink no longer deems the wealth she gave away to be hers.

How can the accountant and financial planner build a Will so that the child continues to get a pension?

Pretend Mary’s mother is still alive. Mary takes her mother to the Accountant and Financial Planner. There are many strategies available to them. For example, the Accountant and Adviser visit our website and build a 3-Generation Testamentary Trust Will. The 3-Generation Testamentary Trust Will names Mary and her children as beneficiaries. The 3-Generation Testamentary Trust is flexible. Each beneficiary can receive a portion or none of the estate.

After her mother dies, likely, Mary will not be deemed to own the wealth in the 3-Generation Testamentary Trust Will. If so, Mary then retains her $1 pension and all-important Concession Card.

What about companies, Family Trusts and 3-Generation Testamentary Trusts?

1. Private Company

For Pty Ltd, your share of the income and assets may be used to calculate your pension. But only if your company meets at two or more in the relevant financial year:

1. the consolidated gross operating revenue for the financial year of the company and its subsidiaries is less than $25 million
2. the consolidated gross assets at the end of the financial year of the company and its subsidiaries are less than $12.5 million, and the company and its subsidiaries have fewer than 50 employees at the end of the financial year, or
3. the company came into existence at the end of the last financial year

2. Trusts

These rules only apply to ‘private trusts’. These are:

1. family trusts (also known as a Family Discretionary Trust
2. testamentary trusts
3. 3-Generation Testamentary Trusts
4. fixed trusts with fewer than 50 members

They do not include:

1. fixed trusts with more than 50 members
2. Self-managed superannuation funds, or
3. any public trusts, such as listed property trusts or equity trusts

Attribution in Centrelink and deceased estates

If you are ‘attributed’ with any portion of the assets or income of a private company or private trust, those assets and income are treated as yours. This is based on two tests:

1. control (including control via an associate), and
2. source

a) Control test

Who controls the private company or private trust? We all know that the Trustee (especially in a Family Trust) is a puppet. Others control the trust. For example:

1. 1. what can sack and appoint a trustee – for a Family Trust, it is the Appointor
   2. veto a trustee’s decision, or
   3. build a Deed of Variation

The trustee or some other person may also hold some of the above powers. You may control the trust if you can boss the person in power. Can you influence their decisions?

b) Source test

This is where you transfer assets into the company or trust, and you do not receive value in return, but you retain control. In a contract, where you can prove a genuine gift and no further involvement, then there is no attribution. (This is after the 5 years have passed.)

Relinquishing control

If you relinquish control of a private trust, or private company or give in a Will, you will be considered to have gifted the assets held by the trust or company. A 5 year deprivation period applies. The deprived amount is based on the market value of the deprived assets and your level of control.

How to relinquish all beneficial interests?

Our friends at Centrelink are not much into tax. So they say silly things like ‘amending the trust deed to remove you and your partner as beneficiaries of the trust or
creating a separate deed to renounce you and your partner’s beneficial interest in the trust’ satisfies relinquishment. However, you can’t amend a Family Trust deed to change a beneficiary. It is a resettlement under the ATO’s view, irrespective of the Commercial Nominees case (High Court, 2001).

3. Three-Generation Testamentary Trusts

Death and Probate Duties were abolished by 1981. However, in 1985, the Federal Government introduced the Capital Gains Tax. Capital Gains Tax now earns the Australian Federal Government more money on deceased estates in a single year than in the cumulative history of death duties.

Contrary to what Treasurer Paul Keating told us back in 1985 when he introduced the Capital Gains Tax, it is now more often applied to your family home. Even your pre-1985 family home can be subject to Capital Gains Tax.

A 3-Generation Testamentary Trust is the most effective safeguard to put into your Will to dampen the effects of Capital Gains Tax and Stamp Duty.

This is an example of a Will without a

Tom’s Will made the Taxman rich

Tom always wanted to build his retirement home on the canals where he had purchased a block a few years ago. Unfortunately, Tom died before realising his dream to build on the block.

As a dutiful husband, Tom left everything to his much-loved wife Jenny.

Little did Tom know, but Jenny never shared Tom’s vision to live by the canals. However, their two children did share Dad’s vision. Jenny decided to give the children the block of land. After all, it was now interfering with her aged pension and pharmaceutical entitlements.

The gift made the children excited. The block had increased in value to $175,000. However, the children were less excited when they got a Stamp Duty bill of over $4,200.

Later, Jenny gets a notice from the Tax Office to pay Capital Gains Tax of $28,000.00 on the “disposal” of the block. (“But I just gave it away!” she lamented)

The nightmare continues when Centrelink advises Jenny that the gift reduces her entitlements because of the Non-Abandonment rule.

All this seems very unfair to Jenny. They had paid taxes throughout their life. Jenny gave the block away, yet Capital Gains Tax, Stamp Duty and Centrelink all became problems.

But there is a way that Tom and Jenny could have fought back…

Tom could have put 3-Generation Testamentary Trusts into his Will. Tom’s Will then leaves everything to his wife, children and extended family. Tom also makes his wife Trustee of the 3-Generation Testamentary Trust. Jenny controls the assets but does not own them for tax purposes.

Does that mean that Tom’s estate goes to Tom’s mother-in-law and Uncle Harry? Do the children have control over what Jenny does with her husband’s estate?

No to both questions.

Jenny has complete control of who gets what from the estate. With a Testamentary Trust, Jenny can give everything to herself or give some things to the children, grandchildren or any of the extended family as she so wishes. With her accountant’s help, Jenny can take advantage of the lower income tax rates paid by some members of her family. Now that is flexibility.

Flexibility: 3-Generation Testamentary Trust?

In the above case, Jenny could have merely distributed the block to her children through Tom’s Will. Even if the transfer took place years after Tom’s death, the transfer is direct from Tom to his children. Therefore:

1. No stamp duty is payable because Jenny did not own the land – she merely controlled the land in the Testamentary Trust.
2. There is no “disposal” of the land. Therefore, Jenny does not have a Capital Gains Tax bill – CGT Generation Skipping.
3. Alternatively, the asset could have been kept out of Jenny’s hands to protect her Centrelink entitlements.

Do children benefit from the 3‑Generation Testamentary Trust?

The Tax Man penalises your children and grandchildren under 18 years of age who receive unearned income over $416 per year. Above this amount, children pay tax at a rate of 66% and then the highest marginal tax rate.

This is not the case with a 3-Generation Testamentary Trust. A Testamentary Trust operates through your Will only at your death. A Testamentary Trust offers the benefits of tax-effective income splitting without attracting the penalty tax. Minors deriving income under a Testamentary Trust get the benefit of the same tax-free threshold as adults.

Pensioner beneficiary rich enough for a 3-Generation Trust Will?

Of all the people who paid Capital Gains Tax last financial year, 80% earned income of less than $80,000. Capital Gains Tax is a tax on the middle class.

The only people who do not need a 3-G Testamentary Trust in their Wills are people who feel guilty for not paying enough tax during their lives. Even if your only major asset is your family home, you can gain tax advantages from a Testamentary Trust.

Estate Planning is not for the rich. It is for people who prefer not to pay more tax than is required.

Pay CGT on my family home?

When the press was alerted to them, the ATO withdrew its two booklets:

• Capital Gains Tax and the Assets of a Deceased Estate; and
• Capital Gains Tax and the Family Home.

For updated copies of these books, telephone the ATO on 13 2861.

Unfortunately, the books do not tell you how to reduce Capital Gains Tax on your home or your deceased estate; they just give you advice on how the Government collects its money when you die.

Paul Keating told me in 1985 that my home was exempt from Capital Gains Tax

A lot has happened since then. Within one generation, every asset in Australia will fall within the CGT regime. Even the family home is not automatically exempt.

You can own property with another person either as Joint Tenants or Tenants in Common. When a joint tenant dies, his or her interest goes automatically to the survivor(s) – not via the Will.

Joint tenancy lost popularity in 1983 when probate duties were abolished

In the past, it was common for married couples to purchase assets, such as family homes and investment properties, jointly as Tenants in Common. Capital Gains Tax legislation does not recognise Joint Tenancy in its calculation of Capital Gains Tax. Generally, holding assets as Joint Tenants is now considered dangerous.

By owning property as Tenants in Common and including a 3-Generation Testamentary Trust in your Will, you can provide your accountant with the flexibility to significantly reduce any Capital Gains Tax that may be payable on your home.

A  3-Generation Testamentary Trust allows a beneficiary to set up many or no testamentary Trusts. If a 3-Generation Testamentary Trust is activated as a result of your spouse dying, you are attributed with the assets and income of the trust only if:

• you directly control the trust, or
• an ‘associate’ has control and you are a potential beneficiary

Therefore, if you do not want the assets to be taken into account for Centrelink, put in your Accountant or Financial Planner as the Appointor of the 3-Generation Testamentary Trust.

Can a pensioner escape from a Family Trust?

Often, a Centrelink beneficiary can be removed from a Family Trust. This is different to a pensioner rejecting an actual gift or right.

Centrelink benefits are worthless compared to my children divorcing and going bankrupt

Q: Professor Davies, I do not like your article. Sure, I give all my assets to my children to get Centrelink, but what if my greedy children divorce and go bankrupt? Everything I gave them is then lost. This is all to get some miserable government pension and the pathetic Concession card.

A: Well, I happen to agree with you.

In my opinion, clients often focus on securing a pension or government benefit. They say, ‘It is my right, after paying taxes all my life, to get something back from the government’.

I would not personally hand over millions of dollars’ worth of assets six years before I intend to retire. Forget about the Capital Gains tax and the stamp duty, what if you run out of money yourself? Rather, after my wife and I die, through our 3-Generation Testamentary Trust Mirror Wills, our children get our wealth with:

• no capital gains tax
• no stamp duty
• protected by a Divorce Protection Trust
• protected by a Bankruptcy Trust

That is worth a lot more to me than the short-term gain of a pension.

But this is my personal view. As a Professor in tax law, I have no skill in financial planning. Rather, such questions are the province of the financial planner and the accountant. The adviser, accountant and client come to me with what they want. They then build those documents on our website.

Can a 66-Year-Old Client Abandon Her Inheritance to Preserve Her Aged Pension and Redirect It to Her Children?

Q: My client is 66 years old. When her father dies, she gets everything. If she gets her father’s estate, she loses the Centrelink aged pension. Can she subrogate her rights to the inheritance to her children? Can all beneficiaries agree that she will not receive the investments, allowing them to pass directly to her children?

I recall that when you were lecturing me at Western Sydney, you said that beneficiaries can sign a deed of arrangement to distribute assets differently from the Will’s terms. Does that work? What about a Deed of Disclaimer?

A: Neither a Deed of Family Arrangement nor a Deed of Disclaimer works for Centrelink. It is also terrible for stamp duty and Capital Gains Tax. Consider these options:

Options for Preserving the Aged Pension While Redirecting Inheritance

Understanding Centrelink’s Deprivation Rules

In Australia, Centrelink’s deprivation rules under the Social Security Act 1991 (Cth) section 1126 treat the abandonment of an inheritance as a gift if it reduces a pensioner’s assets to maintain or increase their pension entitlement.

If your 66-year-old client disclaims her inheritance to avoid exceeding the assets test, Centrelink will likely deem the disclaimed amount a deprived asset. Gifts exceeding $10,000 per financial year or $30,000 over a rolling five-year period are considered deprived assets and remain assessable under Centrelink’s assets and income tests for five years from the date of disposal. This means that even if your client forgoes the inheritance, its value still impacts her aged pension for up to five years, potentially reducing or eliminating her entitlement.

Subrogating or Disclaiming an Inheritance through a Deed of Disclaimer

Sure, your client can disclaim her inheritance, but this must be done carefully to be legally effective.

• • • A beneficiary can disclaim a gift under a Will, provided the disclaimer is communicated clearly and within a reasonable time of becoming aware of the gift. See Federal Commissioner of Taxation v Cornell (1946) 73 CLR 394.
    • The disclaimer must be total, not partial, and ideally documented through a formal deed to avoid ambiguity. See Commissioner of Taxation v Ramsden [2005] FCAFC 39).

However, Centrelink’s deprivation rules will still apply, treating the disclaimed inheritance as a gift, which defeats the purpose of preserving her pension. Stamp duty and CGT are also suffered.

Using a Deed of Family Arrangement to get rid of the unwarranted inheritance

Alternatively, beneficiaries can enter into a deed of family arrangement to redistribute the estate’s assets differently from the Will’s terms. This deed requires all interested parties, including the executor and beneficiaries, to be adults with mental capacity and to agree voluntarily. In your client’s case, if all beneficiaries, including herself and her children, agree, they could execute a deed to direct her share of the investments to her children.

However, Centrelink will still assess this as a deprivation of assets, counting the redirected amount in her assets test for a period of five years. Additionally, such arrangements must not contravene public policy, such as avoiding legitimate claims for family provision. And, again, CGT and stamp duty raise their ugly heads.

The Optimal Solution: 3-Generation Testamentary Trust

A more effective solution to preserve your client’s aged pension while ensuring her children benefit from the inheritance is to include a 3-Generation Testamentary Trust in her father’s Will. This trust, activated upon the testator’s death, allows flexible distribution of assets among beneficiaries, including your client and her children, without necessarily attributing the assets to her for Centrelink purposes. If structured correctly, with an independent appointor, such as an accountant or financial planner, controlling the trust, the assets and income are not attributed to your client unless distributed to her (Social Security Guide, ‘4.12.3.30 Testamentary Trusts’, https://guides.dss.gov.au). For example, the trust could distribute income or capital to her children, thereby bypassing her entirely and avoiding the assets test threshold.

Benefits of a 3-Generation Testamentary Trust

A 3-Generation Testamentary Trust offers additional benefits, including reducing Capital Gains Tax and stamp duty, as well as protecting assets from creditors or family law claims. In Schweitzer v Schweitzer [2012] FamCA 445, the court respected the structure of a trust where a beneficiary did not directly control assets, highlighting the protective nature of well-drafted trusts. By incorporating a 3-Generation Testamentary Trust, your client’s father can ensure the investments are managed tax-effectively and shielded from Centrelink’s deprivation rules, allowing your client to retain her pension while her children receive the intended benefits.

Of course, your client’s father needs to be of sound mind and alive to make a Will!

Written by Adjunct Professor, Dr Brett Davies (Partner) and Madeleine Baxter (Solicitor) at Legal Consolidated Barristers & Solicitors