Saving the home and pension

Usually, couples purchase their principal home as joint tenants. This ensures that the surviving spouse automatically retains access to their home on the death of their partner and a full Capital Gains Tax (CGT) exemption on their home if their partner dies. 

As the principal home is not counted as an asset for the age pension asset test, having such a large asset doesn't affect their Centrelink support. However, what happens if the surviving spouse wants or needs to sell their home? Perhaps they need funds for themselves or to support their family, they may need to cover aged care fees and charges or they simply need to downsize. 

Whatever the reason, selling the family home may affect the Centrelink entitlements because the funds received from the sale of the home would now count towards the assets and income test. Below is an estate planning strategy to consider. 

Jack and Olivia's gifting strategy 

Note: The following gifting strategy relies on the clients having large equity in their home.  

Jack and Olivia own their principal home, valued at $1,000,000 and are unencumbered as joint tenants. Upon Olivia's death, her share automatically vests to Jack. If Jack sells this home (tax-free) and downsizes to a $400,000 apartment unit, he would then have $600,000 in cash, which would be counted as an asset for his age pension assessment. With this level of assets, he would be nearing the higher asset threshold and qualify for a small part pension (assuming the he has no other savings). 

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An alternative arrangement would be for Jack and Olivia to each own their share of the principal home as tenants in common in equal shares. When either of them dies, their share can go to their children or dependants via their estate, leaving the surviving spouse with 50 per cent interest in the home. Assuming all beneficiaries of the home agree, Jack may sell the home, realise his $500,000 interest - enough to purchase a small home unit of $400,000 and $100,000 for current living expenses. This will ensure that Jack is entitled to a higher age pension, if not the maximum pension. The beneficiary of the remaining interest will receive a cash inheritance.  

This gifting strategy relies on: 

• Jack and Olivia having a valid / updated Will to direct their intentions; and  
• an agreement from their beneficiaries to support Jack's wishes to downsize the home. 

Assuming that the home was not used to produce income at Olivia's date of death, the executor or the beneficiaries of the home will generally have two years from that date to sell the home and not incur any CGT. The surviving spouse should continue to enjoy the CGT exemption on their share of the home, provided the home is not used to produce an income (exceptions apply).    

This strategy may have pros and cons for Jack. One positive implication, is that if he ever needed to move into a residential aged care home, he would be assessed as having fewer net proceeds than if the former home was held as joint tenants and later sold. This would likely translate into a lower accomm-odation payment and means tested care fees as a result of the deemed income or actual incomes generated from remaining assets.  

For someone wanting to use this strategy, it is not too late to change the title holding now (please refer to the 'Capital Gains Tax' information outlined below). Some states charge little or no stamp duty on transfers between husband and wife. Clients should obtain independent tax advice regarding this point. 

A negative possibility is that, with fewer assets after downsizing, Jack finds the $100,000 insufficient to meet his retirement needs. Clients need to be well advised to ensure they have other assets to draw upon to protect themselves against longevity risk.  

Alternative solutions 

Alternatively, Olivia may give a life interest to Jack with respect to her share of the home. This will allow him to remain living in the home and the remainder interest to be distributed to their children, with Jack retaining discretion as to when he wants to sell the home. Distribution of available sale proceeds to their children may occur only after he has sold the original home and has repurchased a smaller home or entered into aged care. 

Many variations of the above scenario could be tailored for clients depending on their individual circumstances and objectives. These will also largely be dictated by their estate planning requirements. Hence good advice becomes paramount as the variations of the strategy implemented is ultimately influenced by many specialty areas including tax, social security, residential aged care as well as legal advice. 

Capital Gains Tax 

Provided there is no change in beneficial ownership, no CGT  will be triggered on a conversion from a joint tenancy into a tenancy in common in equal shares.  

Stamp Duty 

State and territory governments impose stamp duty on the transfer of land. The amount of duty applicable depends on a scale fixed by each state or territory. 

Some states and territories permit exemptions for the transfer of land between spouses. This is normally restricted to transfers of a principal residence between spouses on the basis that, as a result of the transfer, the spouses both own the property either as joint tenants or as tenants in common. 

Conclusion 

Clients are seeking innovative strategies when completing their estate planning. A large part of the intergeneration wealth transfer will involve the family home or its net sale proceeds. These shouldn't be ignored or assumed to maintain current exemptions. This is especially so when clients are relying on retaining valuable government entitlements. 

Clients are recommended to seek independent tax and estate planning advice in this matter.   

William Truong is technical services manager at IOOF.