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Disregarded Assets Relating to Deceased Estates and Funeral Expenses
Last amended: 27 June 2012
Assessing assets relating to deceased estates
Any asset a person inherits from a deceased estate which has not been received and is not able to be received for any reason is an exempt asset.
This exemption also applies to contingent, remainder or reversionary interests which are inherited, with the exemption continuing until such time as the contingent, remainder or reversionary interest is able to be received. A contingent, remainder or reversionary interest is only immediately assessable if it was created by the person or their partner.
Deceased estates creating a life interest
A contingent, remainder or reversionary interest may arise where a person other than the legal owner has a life interest. A life interest can be created without recourse to a formal or legal written agreement such as a will. For example, if a disabled or elderly relative who may or may not be a part owner of a house, has a long term attachment to it, and an understanding exists that this person is to have possession of the house until death or choosing to move out, then a beneficial life interest exists and can be recognised. This means that the property cannot be counted as an asset in the assessment of a DVA pension recipient who has legal title. This exemption continues until the life interest ceases, for example on vacating the property.
A cemetery plot is a single plot in which it is intended to bury a person or their partner. A cemetery plot acquired by a person for themselves or their partner is an exempt asset. For couples, each member of the couple can have the value of a plot as an exempt asset.
The amount of an advance payment made by a person for funeral services in respect of the person or their partner (a prepaid funeral) is an exempt asset. Factors that might be taken into account in deciding if a person has a prepaid funeral for themselves or their partner include:
- whether there is a contract,
- that nothing further needs to be done for funeral services to be provided in accordance with the contract, and
- the prepayment cannot be refunded, unless the person moves outside the designated funeral service area.
There is no limit applied to the amount that a person may invest in a prepaid funeral. However, if a person has a prepaid funeral, their funeral bonds cannot be exempt assets.
A funeral investment is usually called a funeral bond. A funeral bond is an investment offered by a friendly society or life insurance company to allow a person to set aside money to cover funeral costs of themselves or their partner. The bond provides benefits only upon the death of the nominated person and cannot be accessed earlier.
Depending on whether the requirements to be exempt are met, a funeral bond is assessed as either:
- an exempt funeral bond, which is disregarded from the assets and income tests, or
- a non-exempt funeral bond, which is counted under the assets and income tests as a managed investment at current value using the deemed income rules.
Exempt funeral bond
Up to two funeral bonds per person's funeral may be treated as exempt assets if the combined amount invested does not exceed the funeral bond threshold. The following table describes the other conditions that must also be met for the exemption to apply.
To be exempt the funeral bond must meet:
all of these conditions
and one of these conditions
If the above conditions for exemption are met, the exempt funeral bond is disregarded from the income and assets tests, and any return from the exempt funeral bond is also disregarded.
Note: The “amount invested” in a funeral bond refers to the total capital invested in the funeral bond and does not include any fees charged or increases in the value of the investment over time.
Assessment of funeral bonds that are terminated before maturity
If funeral bonds are held in a company that is wound up, the initial receipt of proceeds from the termination of the funeral bond are not counted as income, as they are considered to be a return of the individual's own capital. However, depending on how the person uses the funds, the return will be taken into account under the income and assets test.
If the funds are transferred to another funeral bond and the value of the new bond is less than the allowable funeral investment threshold, it will remain exempt from assessment under the income and assets test.
If the funds are invested, they are assessable as a financial asset and are subject to deeming.
If the funds are used to purchase an asset, such as a car, then the value of the asset will be assessable.
Multiple funeral bonds
If the amount invested in two bonds exceeds the funeral bond threshold, or the person has more than two bonds, a beneficial decision is made about which combination of up to two exempt funeral bonds provides the best pension outcome. The value of the non-exempt bond will then be included in the pension assessment. This can only occur where the value of each of the bonds individually, is lower than the funeral bond threshold.
Where the combined amount invested in multiple bonds exceeds the funeral bond threshold, or the person has more than two funeral bonds, the current value of the funeral bonds is assessable. That is, the value of the funeral bond investment, plus any return on the investment.
For example, the combined amount invested in two bonds exceeds the funeral bond threshold and a choice must be made about which bond to exempt. The old funeral bond has an amount invested of $5,000 but a significantly higher current value of $11,000. The new bond has an amount invested of $9,000 and a current value of $9,500. Because the old bond has a higher current value, it is more beneficial for the old funeral bond to be assessed as exempt and the new bond as non-exempt.
Joint funeral bonds
For exemption purposes, the total amount invested in a joint funeral bond counts towards the funeral bond threshold of each party to the bond and is not halved. Each member of a couple may have up to two funeral bonds exempted if the sum of the amount invested in each member's bonds does not exceed the funeral bond threshold.
Example of joint bond exemption assessment
A couple have invested $5,000 in a joint funeral bond. One partner has also invested $4,000 in an individual bond and the other partner has invested $3,000 in an individual bond. Their assessment for exemption is:
- partner A has invested $5,000 + $4,000 = $9,000 towards his funeral
- partner B has invested $5,000 + $3,000 = $8,000 towards her funeral
Each member of the couple is considered to have two bonds (the joint bond plus their individual bond).
Prepaid funeral involves a funeral bond
Some funeral providers advise clients to purchase a funeral bond from an insurance company or friendly society in payment for the prepaid funeral. The following table describes how to determine the ownership of the funeral bond for this arrangement.
If the prepaid funeral involves a funeral bond that has...
not been assigned by the pensioner
the pensioner remains the owner of both the funeral bond and the prepaid funeral, which means
been assigned by the pensioner
Assignment of a funeral bond to a funeral director
Assignment to transfer ownership of the funeral bond to the funeral director requires the following factors to be met:
- the funeral director is nominated on the funeral bond investment form, and
- there is a contract for a funeral between the pensioner and the funeral director, and
- the funeral bond cannot be refunded, but may be reassigned to another funeral director.
- the value of a person's principal home,
- any motor vehicle provided under the Vehicle Assistance Scheme,
- the value of any medal or decoration awarded for valour, other than used as an investment or hobby,
- up to two funeral bonds where the combined amount invested is within the funeral bond threshold,
- a prepaid funeral or cemetery plot
- value of a superannuation fund investment prior to pension age.
For a full legislative definition see section 52 of the VEA.
A prepaid funeral is a funeral purchased in advance. The type and style of funeral is documented in a contract and the funeral is paid for at today's prices. There are no further costs to be paid regardless of when the funeral is required. A prepaid funeral is assessed as an exempt asset and no threshold or limit applies.
An investment is a managed investment if:
- the money or property invested is paid by the investor directly or indirectly to a body corporate or into a trust fund,
- the assets that represent the money or property invested (the invested assets) are not held in the names of investors,
- the investor does not have effective control over the management of the invested assets, and
- the investor has a legally enforceable right to share in any distribution of income or profits derived from the invested assets.
For a full definition see also:
Sections 5J(1A), 5J(1B) and 5J(1C) of the VEA.