December 4, 2018

Wills & Estates

A person with a severe disability may be entitled to financial advantages where they are a beneficiary of a special disability trust. This may be a useful estate planning tool in providing for the future care and accommodation needs of a person with a severe disability.

Before establishing a special disability trust, it is essential to understand what a special disability trust is, its advantages and restrictions and when it may be suitable to use to provide benefit to a person with a severe disability.

SPECIAL DISABILITY TRUST ESSENTIALS

Establishment

A special disability trust is a trust which can be established during your lifetime by a trust deed or after death by your will to benefit a person who has a severe disability.

Before a special disability trust can be established, the intended beneficiary must be eligible to be a beneficiary (and be assessed as such by Centrelink) and the trust deed for the special disability trust assessed as compliant by Centrelink. If a special disability trust is to be established in a will, it only takes effect after the death of the will maker, and at that time the terms of the trust in the will for the special disability trust and the beneficiary should be assessed by Centrelink as a compliant trust deed and an eligible beneficiary.

Beneficiary

There are restrictions on who is eligible to be a beneficiary of a special disability trust. There are different rules depending on whether the person is under or over 16 years of age.

Below is a summary of the current eligibility criteria.

If the person is 16 years of age or older

If the person is under 16 years of age

The person has a level of impairment which qualifies the person for the Disability Support Pension or who is already receiving a Department of Veterans’ Affairs (DVA) Invalidity Service Pension or DVA Invalidity Income Support Supplement; and

The person has a severe disability or a severe medical condition; and

The person has a disability and is unable to work more than seven hours a week in the open labour market; and

The person has a carer who has been given a qualifying rating of ‘intense’ under the Disability Care Load Assessment (Child) Determination for caring for that person; and

The person has a disability that would if the person had a sole carer, qualify the carer for the carer payment or carer allowance or is living in an institution, hostel or group home where care is provided for people with disabilities and funding is provided under an agreement between the Commonwealth, States and Territories.

The person has had a treating health professional certify in writing that, because of that disability or condition: the person will need personal care for six months or more and the personal care is required to be provided by a specified number of persons.

Use of assets

Once established, a special disability trust can meet the costs of particular care, accommodation and medical expenses for the beneficiary during their lifetime. However, there are some restrictions on what the assets can be used for, so it is vital to take advice on whether it is suitable for the intended beneficiary or not.

Termination

A special disability trust will continue until no assets are remaining in the trust, the beneficiary dies or an earlier date if required by law. When the beneficiary dies, the special disability trust will terminate, and the trust deed can name residual beneficiaries who will receive the remaining assets of the special disability trust.

MAIN FINANCIAL ADVANTAGES OF A SPECIAL DISABILITY TRUST

A special disability trust may provide financial advantages to eligible family members and the beneficiary of the special disability trust.

Eligible family members can gift to a special disability trust without it affecting their government benefits

Almost anyone can make contributions or gifts of assets of any value to a special disability trust. However, thought needs to be given to whether the government pension (if any) of the person contributing or gifting assets and of the beneficiary may be adversely affected.

Eligible immediate family members can gift a combined amount up to $500,000 to the special disability trust without it affecting their government pension. Immediate family members of the beneficiary who are 18 years of age or older and are receiving a government pension are eligible for the gifting concession.

Eligible immediate family members include natural parents, legal guardians (including a person who is or was the legal guardian of the person with a severe disability while that person was aged under 18 years), adoptive parents, step-parents, grandparents and siblings (includes brothers and sisters, half-brothers and sisters, adoptive brothers and sisters, step-brothers and sisters)).

Effect on beneficiary’s government benefits

A beneficiary of a special disability trust may hold more assets than a person without a special disability trust without it affecting their Centrelink pension. This is because certain assets are exempt in calculating the beneficiary’s Centrelink pension. Exempt assets include:

  • The beneficiary’s principal place of residence;
  • Exemption of up to $669,750 (indexed 1 July each year) of assets in the special disability trust; and
  • Income of the special disability trust.

Taxation of a special disability trust

Any undistributed income of a special disability trust is taxed at the beneficiary’s personal income tax rate. Usually, any undistributed income of a trust is taxed at the highest marginal tax rate.

restrictions on use of assets in a special disability trust

The financial advantages of a special disability trust may be appealing. However, assets of a special disability trust can only be used to meet the reasonable care needs of the beneficiary that are met in Australia and the reasonable accommodation needs of the beneficiary. These are needs which arise as a result of the disability of the beneficiary and for the accommodation of the beneficiary.

In addition to reasonable care needs and accommodation needs, a discretionary amount may be spent on items that aid the beneficiary’s health, well-being, recreation, independence and social inclusion (for the 2018/2019 financial year this amount was $12,000, and is indexed annually on 1 July).

Below are examples of reasonable care needs, accommodation needs and relevant discretionary items.

Examples of reasonable care needs

Examples of reasonable accommodation needs

Examples of discretionary items (up to $12,000 for 2018/2019 financial year)

specialised food specified by a medical practitioner as essential for the beneficiary’s health

payment for the purchase of the beneficiary’s place of residence if the payment is not made to an immediate family member of the beneficiary

food other than food specified by a medical practitioner as essential for the beneficiary’s health

mobility aids, prostheses and positioning aids required for, or because of, the beneficiary’s disability

payment of accommodation bond for the beneficiary if the payment is not made to an immediate family member of the beneficiary

toiletries such as toothpaste, toilet paper, soap

modified vehicle, if required for, or because of, the beneficiary’s disability

payment of rental for the beneficiary’s place of residence if the payment is not made to an immediate family member of the beneficiary

payment of building and contents insurance and utilities charges in connection with the beneficiary’s place of residence

communication devices (including computers) that are essential, or that have been modified, because of the beneficiary’s disability

modification to the beneficiary’s place of residence arising from his or her disability

clothing and footwear that is not required for the beneficiary’s disability

medical related and dental costs of the beneficiary, including but not limited to: health insurance and ambulance cover, medicines, surgery, specialist and general practitioner services

maintenance of SDT property if there is a reasonable need and if the payment is not made to an immediate family member of the beneficiary (e.g. replacing several tiles to fix leaking roof, replacing tap washes, fixing leaking pipe, servicing of heating/air-conditioning units, painting of exterior of house once every 10-12 years, monthly garden maintenance (e.g. lawn mowing, pruning))

recreation and leisure activities

WHAT TO DO IF YOU THINK A special disability trust MAY BE USEFUL

The mechanics of a special disability trust can be complex, and proper consideration needs to be given to the statutory requirements and whether a special disability trust is the most appropriate way to provide for a person with the severe disability. If the beneficiary has too little or too many assets, this may make a special disability trust less appealing and make other options more attractive. Consider this example:

“Johnny is a single man who was born with a severe intellectual disability. He owns the home he lives in and has $260,000 in a bank account (assets he was given by his parents). Johnny’s parents want to leave him at least $600,000 when they die to ensure that Johnny has sufficient assets to provide for his care and accommodation after they have both died. Johnny’s parents received advice that if Johnny receives this inheritance in his own name then it will most likely reduce his disability pension and instead if it was gifted to a special disability trust for Johnny that his disability pension will remain unaffected. Johnny’s parents decided to make a will which allows the executor to create a special disability trust for Johnny so that when they die the executor can take advice and consider whether a special disability trust is still appropriate for Johnny to catch his inheritance in.”

A special disability trust can give great comfort to families who have a family member with a severe disability. It is a means by which you can provide for their future care and accommodation needs in a way that may be financially beneficial.

We recommend you seek legal and accounting advice on whether a special disability trust is suitable for the intended beneficiary.