Disability Trusts - Brazel Moore Lawyers
The provision of ongoing care and the gifting of money from your estate for a disabled child is a constant issue of concern for many parents.
Provisions in a Will gifting property directly to a disabled child or even setting up an All Needs Protective Testamentary Trust for a disabled child may prejudice their entitlement to Centrelink benefits.
Since 20 September 2006, changes to the Social Security Act, 1991 (Cth) have allowed for the creation of a Special Disability Trust (SDT). These trusts must have the sole purpose of providing for the current and future care and accommodation of a disabled person.
Key Features –
In summary, the key features of a SDT are:
- The SDT can be established during your lifetime so that it operates immediately from the time it is established;
- Alternatively, a SDT can also be set up like a testamentary trust in your Will, in which case it only operates from the time of your death;
- Trustees must be Australian residents and otherwise eligible to act as a Trustee;
- There can only be one principal beneficiary;
- The sole purpose of the trust must be to provide for the current and future care and accommodation of the primary beneficiary;
- Beneficiaries over 16 years of age must be eligible for the Disability Support Pension;
- Capital invested within a SDT (Maximum: $636,750.00 as at 01/07/2015 & indexed annually) is not subject to Centrelink’s Asset Test;
- Any income generated by that capital is not subject to Centrelink’s Income Test;
- Note that normal income tax rules apply, however, since 1 July 2008 undistributed income will only be liable to the beneficiary’s marginal tax rate rather than the top penalty rate of 49% that applied before then;
- The person with a disability may work up to 7 hours per week in open employment or unlimited hours in the Supported Wage System (SWS);
- The SDT may pay for the beneficiary’s medical expenses, including private health fund fees and maintenance expenses for assets including real estate;
- An amount up to $11,250.00 per financial year (2015/16) may be expended on discretionary items (eg holidays, furniture, etc) – this amount is indexed annually;
- Concessions & benefits for family members (grandparents, parents or siblings) contributing funds to a SDT apply – provided no more than $596,500 (indexed annually) in total is gifted to a SDT – and any gift by a family member receiving Centrelink benefits is not deemed as a deprivation of assets by Centrelink;
- This last point also means that provided the family member is of pension age but was not eligible for the Age Pension due to their assets, they can now legitimately divest themselves of assets and possibly qualify for a full or part pension;
- The capital gains tax (CGT) main residence exemption now includes a residence owned by a SDT – as long as it is used by the principal beneficiary as their main residence (introduced in 2008/2009 this has been backdated to 2006);
- A CGT exemption applies on assets transferred into a special disability trust for nil consideration;
- A CGT exemption applies where the principal beneficiary dies and their main residence is distributed to a recipient who subsequently sells the property within two years;
- A SDT must not accept any asset transferred by the principal beneficiary or their partner, unless the contribution is funded by a bequest or superannuation death benefit within 3 years of receipt of the bequest or superannuation death benefit;
- A contribution to a SDT cannot come from a compensation payment made to the disabled person who is the principal beneficiary of the trust;
- Third parties must not benefit from the trust’s expenditure. The exception is an ‘incidental benefit’ – ie, benefit of a non-cash nature that is minor and provided on an infrequent and irregular basis;
- The trustee must act in accordance with the terms of the trust – this means investing money with care, applying income appropriately, avoiding unnecessary expenses and seeking professional advice when required; and
- When the beneficiary dies, the trust terminates and the trust’s assets will vest in the residual beneficiaries as specified in the trust deed.
Tips and traps
- A SDT can be established through a Trust Deed or a Will but must contain specific clauses in order to be eligible for the concessions – it is recommended the Model Special Disability Trust Deed under the legislation be used for that purpose.
- Make sure you follow the correct steps when establishing a special disability trust as a trust will be assessed under normal rules for both social security and tax purposes where a beneficiary does not satisfy the definition of severe disability under the Social Security Act, 1991 (Cth).
- A beneficiary assessment should ideally be completed before the trust deed is prepared to avoid unnecessary set-up costs.
- Failure to meet these requirements can result in the concessional treatment of the trust being stripped, resulting in the trust being taxed under normal trust rules and potentially resulting in deprivation for immediate family members who have contributed within five years from the date of non-compliance.
- For more information, please see the Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA) website: http://www.fahcsia.gov.au
If you need advice in relation to special disability trusts, call Geoff Brazel, Specialist Wills, Estates and Trusts Lawyer on 43247699. Dealing with Trust Matters has been Geoff’s specialty since 1981.