Providing for a severely disabled loved one after our death?
- What is a Special Disability Trust?
Understandably, parents and family members who care for a severely disabled family member are seriously concerned as to how to best provide for the family member after their death.
Naturally such planning is very much governed by the circumstances of the particular case, and the financial circumstances of the family, however special disability trusts may provide an opportunity to provide for a loved one without affecting their pension entitlements.
Since 2002 Centrelink requirements may attribute all capital and income of a family trust to a beneficiary for Centrelink purposes.
But since 2006 it has been possible to establish a Special Disability Trust (‘SDT’) which benefits from various social security means test concessions (for both the beneficiary and for eligible contributors) and also brings various capital gains tax exemptions and favourable tax treatment to assets in an SDT.
SDT’s are intended to actively encourage private provision of accommodation and care for persons with a severe disability or medical condition, and to facilitate succession planning by parents and immediate family members.
An SDT is not appropriate in every circumstance, and is not a simple arrangement, but in the right circumstances may be of great assistance.
Section 1209L of the Social Security Act 1991 (Cth) sets out the requirements of an SDT, which include that:
- the beneficiary must meet all eligibility criteria (including the definition of severe disability);
- the Trust Deed must be established in the form of the Model Trust Deed, and be approved in each case by Centrelink;
- there can only be one beneficiary of an SDT, and only one SDT per person (although provision should be included as to the recipient of the balance of the trust fund on the death of the primary beneficiary); and
- the SDT must comply with prescribed investment and audit requirements,
and regulates who can be trustees.
The primary purpose of the SDT must be to provide for accommodation and care needs of the beneficiary.
The assets settled on an SDT can (only) include:
- the principal home of the beneficiary; and
- a sum of money (initially 500,000, but which sum is indexed on 1 July each year, and is presently $694,000) and accrued earnings.
Who can an SDT be established for?
To qualify, a beneficiary over the age of 16 must qualify to receive the disability support pension or similar benefits, and have a disability as a result of which he or she is not working and has no likelihood of working for more than 7 hours a week for a wage at or above the relevant minimum wage, or is working under the Commonwealth Supported Wage System. If under the age of 16 years the principal beneficiary must be a person with a severe disability or a severe medical condition such that his or her carer has been given a qualified rate of intense under the Disability Care Low Assessment (Child) Determination for caring for the principal beneficiary.
Use of trust moneys
In addition to the care and accommodation needs of the beneficiary (which may include e.g. specialised food, mobility aids, sleeping aids, modifications to vehicles, transport requirements and daily care fees charged by an approved provider) it is permissible for a certain level of discretionary spending not directly related to care and accommodation to be funded from an SDT, provided that such expense complies with legislative requirements (currently $12,250 for the 2019 – 20 financial year, but indexed annually), which might include e.g. toiletries, recreation and leisure activities, computer equipment and household cleaning services.
Income derived by investment of funds in an SDT is not taken into account for the purpose of calculating social security entitlements, and funds contributed to establish an SDT by an immediate family member are not caught by the usual anti-avoidance gifting rules affecting social security entitlements of the donor of the funds.
Accumulated income is taxed at the beneficiary’s personal tax rate, not the usual maximum rate.
When to set up?
SDT’s can be set up pursuant to a will, or during the lifetime of the person/s establishing the trust [but in our experience more usually from an estate - i.e. so it does not come into effect until after the death of the person making the will.
It is possible to establish an SDT on the basis that any funds remaining in the SDT on the death of the primary beneficiary will pass to e.g. other family members, or to the person/s contributing the funds.
A special disability trust is rarely the whole answer, however it may be a very valuable and useful tool as part of an overall solution in caring and providing for a loved one with a severe disability.
We attach links to the Department of Social Services and the Department of Veterans Affairs websites with useful summaries of the benefits (and limitations) of SDT’s.
If you think a member of your family or someone you know might benefit from considering the creation of an SDT as part of a more general process of estate or asset planning do not hesitate to contact our office.
Regardless of whether an SDT is appropriate in your circumstances, we cannot stress too strongly the importance of proper planning to provide for a severely disabled family member in the event of the death or incapacity of family members upon whom they depend for their care.