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Social Security Payments, Wills and Testamentary Trusts In times where life is growing more complex, modern estate planning may be either a simple matter or a team effort between financial planner, accountant and solicitor. Regardless of the complexity of the estate, effective estate planning means that tailored inheritances are becoming more commonplace. Wills and testamentary trusts can pose a unique challenge for Centrelink when it comes to determining the impact of these devices on a person’s social security entitlement. Role of solicitors Wills and testamentary trusts are usually drafted by solicitors to accommodate the desires of the testator (will-maker). It is no accident that solicitors are often called upon to draft wills, as complex wills can take into account a number of different scenarios that might eventuate prior to (or even after) the testator’s death. As the whole nature of a will can be altered by even the smallest change in its wording, complex wills need to be prepared by people with legal training. Similarly small details can alter the social security assessment of a will and therefore the impact on a person’s pension or allowance from Centrelink. Wills Before looking at the assessment of wills and testamentary trusts for social security purposes, it may be helpful to clarify exactly what these are. A will is a document that identifies how a person’s property is to be disposed of upon their death. (This property is known as their ‘estate’). A will only comes into effect when the testator passes away, and until then it will have no bearing, in itself, on a person’s social security entitlements. A person must normally be of legal age (generally 18) before they can make a valid will. The testator can change a will at any time - while they are alive and of sound mind. A person is not obliged to will any assets they own to anyone else or any organisation, although wills can be challenged in the courts following the testator’s death if a family member or another dependent of the testator feels they have not received sufficient recognition in a will. The most straightforward wills simply identify the persons to receive the property of the testator on their death, with all assets to be distributed within a short period after the testator’s death. Once the assets of the testator have been distributed, the will has been executed and nothing further needs to be done. People in receipt of social security payments who receive the property of the testator will have this property assessed as their own, once they receive it (or are able to receive it). There are few social security issues surrounding straightforward wills and estates. However, less straightforward wills, may put conditions on how and when assets of the estate are to be distributed. These wills often create an ongoing testamentary trust which in turn, can effect social security payments. Testamentary trusts Where a person dies there is always a testamentary trust. Where the will is straightforward and the assets are distributed within a short period of time, the testamentary trust will be quickly wound up and will not be relevant for social security purposes. However an ongoing testamentary trust may be created by a will, where the will directs that instead of dispersing all the assets of the testator on their death, certain assets of the testator are to be held in trust. This might be for the benefit of the testator’s children, spouse or some other person. There is a wide range of limitations and conditions a testator can place on how their assets are to be managed after their death. A common limitation involves a testator directing that an estate be held on trust for their spouse to use and enjoy for their lifetime only. This prevents the spouse selling or giving away the assets of the trust. An additional restriction may be that the spouse will enjoy the use of the trust assets only until they remarry. If the spouse remarries when this restriction applies, then they may lose the right to use the trust assets. When does a will create a life interest? A life interest is created where a person has the right to use assets and the income derived for their life only. If the will makes clear that certain assets can be used by the surviving spouse for their lifetime, but not sold and expended, then the spouse probably has a life interest. This life interest does not form part of the testamentary trust. Except for a life interest in the principal residence, a life interest will need to be actuarially valued to obtain its ‘assessable value for social security purposes’. It is important to understand when a person may have an entitlement to a larger part of the estate than is immediately obvious. Often in these sorts of cases the surviving spouse is given what appears to be a life interest in assets in the trust, but the will later states something like:- “And if my trustees at any time consider that the income from the trust is insufficient to meet the need of my spouse, they may use so much of the capital of the trust as they shall deem necessary to support my spouse”. Such a phrase used in conjunction with a purported life interest means that the surviving spouse has access to all the capital in the estate. In this case, the remaining capital in the estate together with the assets that were purportedly subject to the life interest are treated as trust assets and attributed to the surviving spouse of the trust via the normal attribution rules. Where the terms of the testamentary trust is not straight forward, the decision about how the trust will affect the rate of pension or allowance payment will be completed by a Centrelink Complex Assessment Officer. For more information or an appointment with Centrelink please call 131 021. |
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