We have provided an introduction to SDTs below, including information on the benefits of SDTs and how you can create a SDT during your lifetime or through your Will after your death.
Should you set up a Special Disability Trust?
If you are the immediate family member of a person with a disability, you could benefit from expert legal advice on Special Disability Trusts (SDT).
What is a Special Disability Trust?
A SDT is a form of protective trust which is established to protect the interests of a vulnerable person.
The vulnerable person is the primary beneficiary of the trust but has no control over the assets of the trust. Instead, a trustee is appointed to manage the assets of the trust for the benefit of the vulnerable person and has the discretion to make distributions from the trust to the primary beneficiary or on their behalf.
A SDT offers several levels of protection:
- There is the usual protection offered by a trust. That is that the beneficiary does not own or control the capital fund or inheritance. Rather, the trustee holds the capital on trust and uses the assets and funds of the trust for the benefit of the primary beneficiary, in accordance with the terms of the Will or trust deed.
- The primary beneficiary may receive a regular income stream from the trust. In this way, a SDT can provide for the ongoing care and accommodation needs of the primary beneficiary, but also prevent the possible misuse or loss of the funds if controlled by the primary beneficiary.
- There are also the restrictions on what the SDT funds can be used for (explained in more detail below).
A SDT provides social security and tax benefits not only to the primary beneficiary, but also to the immediate family members. In particular, if a vulnerable person receive a substantial sum of money or assets, by way of inheritance or gift, this may cause a reduction or loss of social benefits. If the money or assets are held in a SDT, the vulnerable person may preserve their social security entitlements (subject to limits). This is covered in more detail below.
How to set up a SDT
A SDT is more frequently established in a Will in which the testator wants to make provision for the ongoing needs of a vulnerable beneficiary on their death. They can do this by leaving the vulnerable person’s inheritance to a SDT established on death to hold and manage the inheritance of the vulnerable person.
A SDT can also be established at any time by Deed.
The terms of the trust will be contained in either the Will or the Trust Deed, but there are required clauses that it must contain in order to qualify as a SDT.
Our experienced estate planning team can work with you to draft a SDT that is customized to suit you and the needs of the vulnerable person.
“Severe disability” is required
The primary beneficiary of a SDT must be assessed as having a “severe disability” by Centrelink or Veteran Affairs (Social Security Act 1991 s1209M(2)).
If the beneficiary is 16 years or older:
1. The beneficiary must:
- Have an impairment that would qualify the person for disability support pension, OR
- Be receiving invalidity service pension under the Veterans’ Entitlements Act, OR
- Be receiving income support supplement under the Veterans’ Entitlements Act on grounds of permanent disability;
2. The beneficiary must:
- Have a disability that would, if the person had a sole carer, qualify the carer for carer payment or allowance, OR
- Be living in an institution, hostel or group home in which care is provided for people with disabilities, and for which funding is provided;
3. The beneficiary must have a disability as a result of which either:
- He or she is not working, and has no likelihood of working, for more than 7 hours a week for a wage that is at or above the relevant minimum wage; OR
- He or she is working for wages set in accordance with the program administered by the Commonwealth known as the supported wage system.
If a person doesn’t qualify as having a severe disability now, you should still consider a SDT if there is a chance that they may be eligible in the future.
Our team can also advise you on alternatives to SDTs and introducing flexibility into your estate plan to adapt to the circumstances of the vulnerable person at the relevant time.
Restricted to care and accommodation needs
The primary purpose of the SDT must be to provide for the care and accommodation needs of the principal beneficiary.
Examples of care expenditure includes:
- The needs arise as a result of the primary beneficiary’s disability
- Payments to a carer (non-related) of the primary beneficiary
- Medical and hospital treatment
- Medical equipment (i.e., wheelchair, hearing aids, mobility aids)
- Private health insurance
- Specialised food if specified by a medical practitioner as essential for the beneficiary’s health
- Sleeping and sensory aids required for the disability
- Personal care aids, pressure care aids and continence aids required for the disability
- Communication devices required due to the disability
- Modified vehicle or modification of vehicle required due to the disability
- Training for transitional or independent living skills
- The daily care fee and any additional itemised fees charged by an approved provider in relation to the primary beneficiary’s care and accommodation in residential care
Examples of accommodation expenses:
- Rental payments and refundable accommodation deposits
- If the SDT owns property – council and other rates, land tax and repairs and improvements
- Modifications of the house due to disability
- Itemised fees specifically relating to the accommodation of the primary beneficiary residing in a residential care service, such as the standard daily fee.
- Maintenance of trust property (but not replacement unless necessary)
There is no limit on the amount of funds a SDT can use on the primary beneficiary’s care and accommodation needs.
The trust can also be used for expenses other than care and accommodation, but only certain expenses and only up to a cap of $13,000 per annum (as of 2022-2023 financial year).
Examples of expenses other than care and accommodation includes:
- Toiletries such as toothpaste, toilet paper, soap, shampoo, sanitary pads and tampons
- Transport, excluding public transport or motor vehicle expenses
- Vehicle maintenance, registration and insurance
- Building and content insurance
- Household cleaning services and products
- Life skills and social inclusion workshops
- Recreation and entertainment
This may appear quite restrictive, but consider that with care and accommodation covered, this frees up pension income to pay for other expenses such as food, clothing and entertainment.
ADVANTAGES: Social security benefits
A SDT qualifies for a substantial level of both ordinary income test and asset test exemption from the means testing rules for pension, health care card and other benefits.
When assessing the primary beneficiary’s assets for social security purposes, the following are exempt:
- The principal residence of the primary beneficiary (whether owned by the primary beneficiary or the SDT),
- Up to $724,750 held in the SDT (indexed annually, as at 1 July 2022), and
- The income generated from the $724,750 asset is also exempt, although subject to income tax.
If the assets of the SDT exceed the cap, the excess is subject to ordinary asset and income tests, means testing caps and thresholds, as is the income attributable to the excess.
There are also social security benefits for immediate family members of the primary beneficiary. This includes parents, guardians, grandparents and siblings. Immediate family members can gift $500,000 to the SDT and it is exempt from gifting rules. This means that a gift of up to $500,000 to the SDT will not affect the donor’s own social security entitlements unless the primary beneficiary dies within 5 years of the gift.
ADVANTAGES: Tax benefits
An immediate family member may purchase an ungeared home or accommodation for the primary beneficiary, held within the SDT, and receive CGT and land tax exemptions.
When a donor transfers an asset to a SDT, there is an exemption from CGT for the transfer.
A SDT is more highly regulated than other forms of protective trust. The trustee is required to provide annual financial statements and conduct independent audits when required. This incurs additional administration costs.
The primary beneficiary and their spouse are not able to gift assets (such as compensation payments) to the trust. The exception is if it is from a recently received inheritance or superannuation death benefits payment received by the beneficiary or their spouse within 3 years or made in consequence of the death of the domestic partner.
The SDT must include certain provisions and there is little room for variance. This is because Centrelink and Veterans’ Affairs have the power to determine whether the terms of the trust meet the requirements for an SDT.
There are also investment restrictions and limitations on the use to which trust property can be put during the primary beneficiary’s lifetime. Trustees are required to prepare and maintain an investment strategy, be prudent in their investments and keep in mind the primary purpose of the trust being the needs of the primary beneficiary.
The trust also cannot be used to benefit an immediate family member of the primary beneficiary, such as to:
- pay an immediate family member or child of the primary beneficiary for any care services they do for the primary beneficiary.
- pay an immediate family member or child for any repair or maintenance to the primary beneficiary’s residence.
- purchase or lease property from an immediate family member or child, even if used for the primary beneficiary’s accommodation.
Should you set up a SDT?
You should consider setting up a SDT if you have a child or immediate family member who may qualify as having a ‘severe disability’. Especially if you are expecting to leave the vulnerable person a significant inheritance under your Will or would like to make provision for their care and accommodation during your lifetime.
Even if the vulnerable person does not qualify as having a severe disability now, you should still consider setting up a SDT the vulnerable person may in the future qualify as a severe disability, for example:
- When the vulnerable person has an illness or injury that is expected to become more severe over time and may reach the severity required by the time the will-maker dies or within three years of that.
- When the vulnerable person may still be a minor and may not meet the severe disability requirements for a minor but may as an adult.
A Special Disability Trust may be a effective way to provide for the ongoing care and accommodation needs of a severely disabled family members. It provides:
- Asset protection from the primary beneficiary and third parties, ensuring the funds can be preserved for the benefit of the primary beneficiary,
- Social security benefits in allowing funds to be available for the primary beneficiary’s ongoing needs but not affect their entitlement to social benefits (subject to limits), and
- Social security and tax benefits for donors gifting money or assets to the trust (subject to limits).
Specialist Will & Estates Lawyers for Sydney and Newcastle
The information in this article is not legal advice and is intended to provide commentary and general information only. It should not be relied upon or used as a definitive or complete statement of the relevant law. You should obtain formal legal advice specific to your particular circumstance. Liability limited by a scheme approved under Professional Standards Legislation.