Overview

Leaving an inheritance to a child on the Disability Support Pension (DSP) is one of the most emotionally significant decisions many parents make. It is also one of the most financially complex. A gift that feels generous and straightforward can, without the right structure, reduce or suspend the very pension it aims to support.

This guide looks at how Centrelink generally treats direct inheritances, testamentary trusts and Special Disability Trusts differently. It also covers why the will and the family’s financial plan need to work together, what happens when a child may lack capacity to manage money, and how the planning can affect other siblings.

Direct inheritance, testamentary trusts and Special Disability Trusts compared

There are generally three ways an inheritance can reach a person on DSP. Each carries different Centrelink and practical consequences.

Direct inheritance

Money or assets left directly to the person become theirs outright. Once received, Centrelink generally assesses the money or asset as the person’s own asset. If the inheritance is held as a financial asset, such as cash or investments, deeming may also apply under the income test. This may affect their pension from the date the inheritance becomes receivable.

A standard testamentary trust

A trust established through the will can offer some flexibility over how and when funds are distributed. A standard testamentary trust does not automatically receive concessional Centrelink treatment. Centrelink may attribute some or all of the trust’s assets or income to the person if they control the trust, can control it, or are able to benefit from it.

A Special Disability Trust (SDT)

An SDT is a specific structure recognised under social security law. It is designed to hold money for the future care and accommodation needs of a person with a severe disability. A properly established and compliant SDT may receive concessional treatment under the assets test, up to a set limit. Centrelink generally does not assess properly permitted SDT expenditure for the beneficiary’s allowable care and accommodation needs as ordinary income, provided the trust remains compliant. SDTs come with strict eligibility criteria and ongoing compliance obligations, so they will not suit every family or every level of inheritance.

How leaving an inheritance to a child on DSP affects the Centrelink tests

Services Australia assesses the DSP under both an income test and an assets test, and applies whichever test results in the lower payment. An inheritance received directly can affect both.

Under the assets test, Centrelink generally counts a lump sum or asset from the date the person receives it. Depending on the amount and the person’s existing assets, this may reduce the pension. In some cases it can stop the pension altogether until assets fall back under the relevant threshold.

Under the income test, if the inheritance is held as a financial asset such as cash, term deposits, shares or managed funds, Centrelink may apply deeming. This applies even if the person has not actually drawn the money down or spent it. Many families are surprised to learn that money simply sitting in a bank account can still generate an assessable deemed income amount.

This is why the structure chosen in the will matters as much as the amount left. A gift that is well intentioned can still leave a person financially worse off overall if it reduces or suspends their DSP as a result.

Why the will and the financial plan need to work together

A will is a legal document. A financial plan considers Centrelink entitlements, tax, cashflow and long-term security. When a solicitor and financial adviser work on these separately, gaps and unintended consequences are common.

A solicitor drafting a will may not always see a beneficiary’s current Centrelink assessment or aged care considerations. They may not know how Centrelink will actually assess a proposed testamentary trust or SDT in practice. A financial adviser, in turn, cannot amend a will. Coordinating both means the drafted legal structure has a genuine chance of achieving the financial outcome the family intends.

Families generally do better when the solicitor and financial adviser work from the same information. Ideally this happens while they are still drafting the will, rather than after they finalise it.

What happens if the person lacks capacity

Additional considerations apply where the child receiving DSP has a disability that affects their capacity to manage money or make financial decisions. A financial administrator or trustee generally needs to manage an inheritance left directly to a person who lacks capacity. This administrator is usually appointed through the relevant state or territory tribunal process, or may already be in place under an existing arrangement.

This process can take time. Until it is resolved, the inheritance may sit without generating any real benefit for the person, and Centrelink may not assess it favourably. Establishing an SDT, or an appropriately structured trust through the will, can reduce this uncertainty. That is because the family sets out the structure and its purpose in advance, instead of leaving these decisions until after the parent has passed away.

How siblings can be affected by unequal planning

Parents often want to treat all their children equally, but equal and fair are not always the same thing when one child receives DSP. Leaving an equal direct share to a child on DSP can unintentionally reduce their pension. Leaving a larger share into a properly structured SDT may protect their entitlements instead, without disadvantaging their siblings’ shares.

These decisions can also affect family relationships if the family does not explain them clearly. Siblings named as trustees, guardians or financial administrators for a sibling with disability may take on significant ongoing responsibility that the will itself does not reflect. Discussing the reasoning behind the structure, and what each family member can expect, generally reduces confusion and conflict later.

The common thread

Each of these considerations points to the same underlying issue. An inheritance intended to support a child on DSP can only do so if the family structures it with Centrelink, capacity and family dynamics in mind from the outset. A well-meant gift, left without this planning, can leave the person it aimed to help in a harder financial position.

Whether you are updating an existing will or starting an estate plan for the first time, our Special Disability Trust FAQs guide is a useful starting point. From there, a conversation with HFI and your solicitor together can help align the will and the financial plan toward the same outcome.