It is common practice for older parents to use the equity in their homes to help their children out financially, but you need to be aware of potential pension issues when entering into such transactions.
All too often, age pensioners use the equity in their home to help their adult children financially without getting adequate legal advice or considering the risks involved in doing so.
Apart from the risk of losing your home, you also risk incurring a significant reduction to or loss of your pension entitlements.
Misunderstandings often arise around the family home because the principal home is an exempt asset and excluded from the social security assets tests. But that doesn’t mean you can do anything you like with it without affecting your pension.
If you transfer legal title of the family home to your children, even if you continue to live in it, it is no longer exempted as a principal home.
Under social security laws, you can gift $10,000 a year ($30,000 over five years) without it affecting your pension. Any amount over is assessed as an asset for five years after they were gifted. They are known as “deprived assets”.
If you sell the property so it does not fall under the gifting rules, the money paid for the property will be treated as an asset and will affect your pension rate. But as you spend the money, you reduce your assets and may be entitled to a higher rate of pension.
You may transfer your property in return for a “granny flat interest” – that is, a right to live in a property for life – and Centerlink will accept there has not been any gifting. Be careful not to give more than the reasonable value or the extra amount is assessed as a deprived asset for the next five years.
Your pension will also be affected if you use your family home as security for your children’s loan, or if you act as guarantor on a loan. Even if the intention is that your children repay the mortgage, the loan will be an assessable asset until it is repaid or considered irrecoverable.
If the child defaults and the house is sold, Centrelink will usually regard the proceeds from the sale of the house as a deprived asset and the pension will be reduced accordingly.
If you mortgage the home to purchase a new property, the full value of the new property will be assessable.
Pensioners are obliged to notify Centrelink of any changes to their circumstances that may affect their pension entitlements.
If Centrelink discovers a transfer, gift or loan, your pension entitlement will be recalculated from the date of the transaction. You may then have to repay the debt and your future payments may be reduced or cancelled.
For more information on property and social security benefits contact Carolyn Hagedoorn.