Special needs require a special trust
Being a parent or carer is a big job. If you have a young child, adult child or relative who has special needs, the job is even bigger. Your role in their lives is critical, and you will be anxious to ensure that protective measures are put in place for them when you’re no longer there.
What is a Special Disability Trust?
A Special Disability Trust (SDT) is a trust regulated by the Commonwealth government and designed to provide a trust for the benefit of a beneficiary who meets the disability criteria set in the legislation. It has trustees who control the fund exclusively for the benefit of the disabled beneficiary. The SDT can be created while you are living or placed in your Will where you can gift an inheritance into it for the benefit of a named beneficiary.
What are the advantages and disadvantages?
One key advantage of the SDT is that assets held by it up to a certain threshold are immune from the Government income and assets tests for disability support pensions.
However, these trusts are more restrictive in terms of dictating the control of the Trust and how money is spent on the beneficiary, given that they are regulated by the Commonwealth government. There is also a limit on the amount you can place into the SDT.
Protecting your vulnerable beneficiary in your Will
Where your intended beneficiary is likely to meet the criteria for an SDT, we recommend including both a protective trust and an SDT in your Will, with specialist clauses to allow your Executors to decide how much each Trust should receive so that any disability pension can be preserved while simultaneously keeping the income flexibility and tax advantages of the protective trust.
This is a sensitive and complex area where you need the full attention of a wills and estates lawyer experienced in the area of special disability trusts to talk through the issues. At your first consultation with us, we will provide you with options to help you best structure your estate plan for your situation so that you can have peace of mind that you have provided properly for your vulnerable loved one.
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Frequently Asked Questions
What is a Special Disability Trust?
A Special Disability Trust (SDT) is a trust regulated by the Commonwealth government and designed to provide a trust for the benefit of a beneficiary who meets the disability criteria set in the legislation. One key advantage of the SDT is that assets held by it up to a certain threshold are immune from the Government income and assets tests for disability support pensions. The Trust can be created while you are living or placed in your Will.
This special needs trust for disabled adults or children requires particular care when being drafted into a Will as it must comply with various legislative requirements in Australia.
What is the difference between a Protective Trust and a Special Disability Trust?
A Special Disability Trust (SDT) needs to meet certain criteria set by the Commonwealth government before it can be established. Most importantly, the beneficiary must be assessed by the Department of Social Services as having a severe disability. The assets held in this type of Trust can only be applied for certain prescribed purposes, including to cover reasonable care and accommodation costs of the beneficiary. A small amount of discretionary spending is allowed each year for things like the beneficiary’s wellbeing, health, recreation, independence and social inclusion.
In contrast, there is no eligibility criteria for setting up a Protective Trust in your Will for vulnerable beneficiaries, including someone with a gambling addiction, drug or alcohol addiction, spendthrift behaviour etc. The assets and income of the Protective Trust can also be applied for broader purposes than the SDT, and the Trustees of a Protective Trust have greater flexibility in this regard.
A key benefit of the SDT is that the assets (up to a certain point) and income earned on those assets are exempt for the purposes of assessing the beneficiary’s government support pension entitlements. The assets in a Protective Trust, however, do not have this same treatment and are generally taken into account when assessing the beneficiary’s government support pension entitlements.
Can I establish a Special Disability Trust now, outside of my Will?
Yes, you can establish a Special Disability Trust (SDT) for a disabled adult or disabled child now, make contributions into it and have the Trust available for use by the beneficiary whilst you are still living. Or you can establish it in your Will, in which case the SDT would only come into operation on your death.
Whether it is established for use now or is placed in your Will for use after your death, the beneficiary will need to be assessed by the Department of Social Services as having a severe disability before the Trust is activated. If you are in receipt of the age pension, there are certain gifting concessions that may be available to you for assets that you gift into an eligible Special Disability Trust while you are living. We recommend that you seek legal advice before establishing an SDT.
Are the assets held in a Special Disability Trust exempt from the income and assets test for the purposes of receiving a government support pension?
Yes, up to a certain threshold, which is set by the Commonwealth Government and indexed annually to CPI. Assets that can be held in the Special Disability Trust (SDT) include cash, investments such as shares, and property. The principal place of residence of the beneficiary of the SDT can be owned by the Trust and does not count towards the threshold of assets that can be held by the Trust.
Any principal place of residence, along with assets up to the prescribed threshold, are exempt for the purposes of assessing the beneficiary’s government support pension entitlements. The SDT can also hold additional funds over and above the threshold, but assets above the threshold will be taken into account and may impact the beneficiary’s government support pension.
All income earned by the Trust must only be used for the benefit of the beneficiary (or for proper administrative expenses).
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