What I really enjoy about being an adviser is the opportunity to resolve client puzzles. Each situation is unique and the solutions are an opportunity to make a real difference to a family’s life.
Recently, I was asked by a client how to protect their child with special needs from potential future financial mistreatment. This was an opportunity for me to dust off my knowledge of trusts and more specifically, special disability trust.
The purpose of a special disability trust
A trust is a legal obligation that details how you want property or assets held for the benefit of a beneficiary administered and managed.
Special disability trusts are primarily established to assist succession planning by parents and family members, for the care and accommodation needs of a child or adult with a severe disability. The name ‘special disability trust’ relates to the social security treatment of the trust, not the actual disability.
The legal requirements for setting up a special disability trust
The first step is to make sure that the special needs person qualifies for a special disability trust. They need to meet the definition of severe disability as detailed in the Social Security Act 1991. The individual will have to go through a process where they are interviewed and assessed by social security. Centrelink has a special division that makes an assessment regarding whether they meet the criteria under section 1209M of the Social Security Act.
The Social Security Act recognises that people with special needs work and positively contribute to our society. If the special needs person is working, the act states that a condition of a disability restricts them from working more than 7 hours a week for a wage that is at or above the relevant minimum wage.
The trust deed must comply with certain conditions, and incorporate compulsory clauses as defined in the model trust deed as laid out by the Department of Social Services.
Anyone except the special needs person or the settlor can be a trustee of a special disability trust. There are two types of trustees and they both must be Australian residents (must be assessed by the Department of Social Services).
- Independent (corporate) trustee – does not have any relationship with the special needs individual and has to be a professional person or a lawyer.
- Individual trustee – A minimum of two trustees are required to ensure the special needs individual’s interests are protected.
The trust can either be activated while you are alive – this gives the special needs individual more independence or set up as part of a will – to protect the special needs individual.
The special disability trust can only have one beneficiary (the special needs individual) and the beneficiary can only have one trust. There are two main restrictions placed on the beneficiary, their living situation and gifting.
The Social Security Act stipulates that the beneficiary is not able to reside permanently outside of Australia – the reasonable primary care and needs for the beneficiary must be met in Australia.
There is also a gifting concession available and the contribution made must be unconditional (you can’t get it back), and without the expectation of receiving any payment or benefit in return (if gifted by you). The beneficiary is only able to give money that they received as an inheritance within 3 years of receipt into the trust. Also, a gifting concession, that does not impact any Centrelink benefits is available for the first $500,000 of gifts contributed to the trust.
The social security implications of a special disability trust
There is no limit to the dollar value of assets that can be held in a special disability trust, however, there is an asset test exemption (for Centrelink benefits) of up to $669,750 (indexed 1 July each year) available to the beneficiary. Another advantage is no income is assessed under the social security income test for the beneficiary. The special needs individual can also have their primary residence in the special disability trust, which is also exempt.
Centrelink has also added a limit of $11,750 to ‘discretionary expenses’ for beneficiaries to improve their level of health, wellbeing, recreation and independence.
In conclusion, the aim of establishing a special disability trust is to provide protection and to ensure that those we love have a secure financial future.
Please note this article provides general advice and information only, it has not taken your personal or financial circumstances into consideration. If you would like more tailored financial advice, please contact us today, one of our advisers would be delighted to speak with you.