Special Disability Trusts
1. What is a Special Disability Trust?
A Special Disability Trust [“SDT”] is a trust which can be created during your lifetime or under the terms of your Will to provide for a person with a severe disability.
There can be significant advantages of giving to disabled beneficiaries in this way because not only does it mean that there be a trustee in place to manage the trust for the benefit of the beneficiary but also, because there are generous social security provisions which can assist to preserve the beneficiary’s pension entitlement despite the giving of a sizable gifts to them through the SDT.
There are various criteria and rules which must be met and complied with in order to successfully establish and qualify for a SDT. A trust will not be a SDT unless these legal requirements are met. For example, a SDT must include many compulsory clauses in accordance with the legislation that governs it. These are provisions that cannot be watered down if the trust is to qualify as a Special Disability Trust. However a Special Disability Trust can have its own individual provisions, so long as they are consistent with the specified requirements.
A beneficiary can only have one SDT created for them. The beneficiary can have other types of trusts as well as a SDT but any additional trusts will not qualify for the generous SDT asset and gifting concessions. In addition, a SDT can only have one beneficiary.
Each SDT is reviewed annually by Centrelink / Department of Veterans’ Affairs . The required documents must be provided to Centrelink / Department of Veterans’ Affairs on or before 31 March each year for the previous complete financial year.
We recommend that financial and legal advice be sought prior to establishing a SDT to ensure that these criteria and rules can be met.
2. Who can create a Special Disability Trust?
Anyone can establish a trust for a person who meets the relevant criteria for an eligible severely disabled beneficiary.
It is important and therefore, recommended that, before a SDT is established, the prospective trust beneficiary be assessed as severely disabled under the legislation for this type of trust. IF a beneficiary does not meet the criteria of ‘severely disabled’ then they are not eligible to be a beneficiary of a SDT.
There are usually four key roles in creating a SDT:
The Settlor: The Settlor is the person or company who, with the trustee(s), establish the trust by contributing an initial amount (typically $10 is the settled sum) and executing a trust deed. After the trust is set up, assets or cash to purchase assets can then be transferred into the trust.
The Settlor will often be an accountant, solicitor or even a distant family member, who will not have an ongoing role in the operation of the trust. A Settlor cannot be a beneficiary, contributor or trustee of the trust.
The purpose of this provision is to stop the person who formally sets up the trust from still being seen as the owner of the trust assets and income for tax purposes. To make sure of this, the Settlor has no further involvement with the SDT.
The Appointor: An Appointor can be any person or corporation who is not the beneficiary or Settlor. The Appointor usually indirectly controls the trust and hires (and also can fire) the trustee or trustees of the SDT. An Appointor is not responsible for the day-to-day running of the SDT.
The SDT deed should provide for the future control of the trust after the Appointor dies.
The Trustee: The Trustee manages the day to day running of the SDT, and makes decisions affecting the day to day operations including making investment decisions aimed at increasing the value of the assets and distributing capital or income of the SDT in accordance with the rules governing it.
Trustees, among other things, must be fully acquainted with the terms of the SDT and their responsibilities, know what the assets and liabilities of the trust are, keep proper accounts and also, prepare and submit tax returns annually.
The Beneficiary: The beneficiary is the person who benefits under the trust. They have no right or claim to any of the trust property until it is vested in them under the terms of the trust. This means that they receive what the Trustee(s) determine is applicable and appropriate under the terms of the SDT deed.
3. What are the main characteristics of a Special Disability Trust?
A SDT must meet the following requirements:
- have only one (1) beneficiary (that is the person for whom the trust is established);
- the beneficiary must meet all the relevant eligibility criteria;
- the main purpose must be to provide for the accommodation and care needs of the beneficiary;
- have a SDT deed that contains all the necessary clauses to meet the legal requirements of a SDT deed;
- have an independent trustee, or alternatively have more than one (1) trustee;
- comply with various investment restrictions;
- provide annual financial statements to Centrelink/Department of Veteran Affairs; and
- conduct independent audits whenever required.
4. Can any amount of money or assets be contributed to a Special Disability Trust?
Assets of any value can be contributed to a SDT at any time. However, any gift or number of gifts whose total value is greater that the allowable concessional amount will be assessed under the normal assets tests for Centrelink purposes. Gifting too much may mean that the disabled beneficiary’s pension is adversely affected.
On the basis that the SDT and the trust deed meet the requirements for a SDT, then at this stage, the first $609,500 of assets with a SDT will be exempt from the Centrelink assets test. This amount is indexed in accordance with CPI each September. In addition, to this where the beneficiary also lives in a house owned by the SDT then this principal residence will also be exempt from the pension assets test.
A care need will be considered a reasonable care need if:
- the need arises as a result of the disability of the beneficiary;
- the need is for the primary benefit of the beneficiary; and
- the need is met in Australia.
The following are examples taken from Centrelink’s Publications of what might be considered reasonable care needs:
- Specialised 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;
- Sleeping and sensory aids required for, or because of, the beneficiary’s disability;
- Personal care aids required for, or because of, the beneficiary’s disability;
- Pressure care aids required for, or because of, the beneficiary’s disability;
- Continence aids required for, or because of, the beneficiary’s disability;
- Communication devices (including computers) that are essential, or that have been modified, because of the beneficiary’s disability;
- Modified vehicle, if required for, or because of, the beneficiary’s disability;
- Modification to vehicle, if required for, or because of, the beneficiary’s disability;
- Transport required for, or because of, the beneficiary’s disability;
- Training for transitional or independent living skills of the beneficiary;
- The daily care fee and any additional itemised fees charged by an approved provider in relation to the beneficiary’s care and accommodation in a residential care service; and
- 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.
An accommodation need of the beneficiary is a reasonable accommodation need if:
- it arises as a result of the disability of the beneficiary; or
- the need to pay for property (whether purchased in part or full, or rented) is for the accommodation needs of the beneficiary AND the property is acquired or rented from a person who is not an immediate family member of the beneficiary.
The need to pay rates and taxes on a property is a reasonable accommodation need if the property:
- is owned by a SDT, and/or
- is used for the accommodation of the beneficiary of the SDT.
The following are examples from Centrelink of what might be considered reasonable accommodation needs:
- Modification to the beneficiary’s place of residence arising from his or her disability,
- 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,
- 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 accommodation bond for the beneficiary if the payment is not made to an immediate family member of the beneficiary,
- Any itemised fees which specifically relate to the accommodation of the beneficiary residing in a residential care service. Note: The standard daily care fee charged by accredited Aged Care Residential accommodation is an approved expense,
- From 1 January 2011, the trust can pay for the maintenance of trust property if there is a reasonable need and if the payment is NOT made to an immediate family member of the beneficiary.
A SDT can undertake some discretionary spending that is not directly related to care and accommodation needs of the beneficiary as long as the expense complies with legislative requirements.
The level of discretionary spending is currently $10,750 (indexed annually on 1 July) in any financial year. This allows SDT greater flexibility to meet additional costs relating to the beneficiary’s health, wellbeing, recreation, independence and social inclusion.
The following are some examples of what a SDT can pay for these from the discretionary amount as they are not considered reasonable care needs:
- Food other than food specified by a medical practitioner as essential for the beneficiary’s health;
- Toiletries such as toothpaste, toilet paper, soap, shampoo, sanitary pads and tampons;
- Vehicle maintenance and vehicle related expenses other than those required for, or because of, the beneficiary’s disability;
- Vehicle registration and insurance;
- Petrol for vehicle;
- Recreation and leisure activities;
- Computer, except if the computer is essential for communication because of the beneficiary’s disability (as this can be paid for out of other trust monies);
- Communication devices unless modified because of the beneficiary’s disability;
- Therapy that is not required for, or because of, the beneficiary’s disability or that is not approved in writing by a medical practitioner;
- Building and contents insurance;
- Payment of utilities charges in connection with the principal beneficiary’s place of residence;
- Household cleaning services;
- Clothing and footwear that is not required for, or because of, the beneficiary’s disability; and/or
- Life skills and social inclusion workshops.
5. What can the Special Disability Trust money and assets be used for?
The income and capital can be used to pay for the reasonable care and accommodation costs incurred by, or on behalf of, the beneficiary, including the costs to facilitate the achievement of this outcome.
There are specific rules that relate to what reasonable care and accommodation needs are and it is important that these rules are adhered to by the trustees of the SDT.
In addition, up to $10,750 each year may be used towards discretionary items. This discretionary amount is indexed each July.
6. What are the social security benefits of a Special Disability Trust?
The gifting concession applies to gifts up to $500,000 per trust.
This concessional amount can only be used once. For example, if an eligible contributor gifts to a Special Disability Trust and receives a concession, then dies, their concession amount cannot be accessed by any other immediate family member. Or if a eligible contributor is of pension age or receiving a pension and gifts $400,000 and receives the gifting concession, then another eligible contributor who receives a pension or reaches pension age gifts $200,000 they can only receive $100,000 as a gifting concession. When the gifting concession has been fully used, any additional contributions by immediate family members will be assessed under the normal gifting rules.
Assets test: All of the trust’s assessable assets are attributed to the beneficiary. For the beneficiary, all assessable trust assets up to the specified limit are exempt from the assets test. The specified limit at 1 July 2013 is $609,500, and is indexed annually on 1 July in line with the ABS Consumer Price Index (CPI). Trust assets above the specified limit will be counted as assessable assets for the beneficiary.
Income test: all of the trust’s income is exempt from the means test for the purposes of calculating the beneficiary’s income support payment as long as all the trust income is only used for the benefit of the beneficiary and administrative purposes, as per the conditions of the use of the trust income.
7. When does a Special Disability Trust end?
The trust will end on the earlier of:
- the death of the beneficiary;
- if/when the assets are fully expended on the beneficiary; or
- any earlier date as required by law (‘the end date’).
For further information about Special Disability Trusts, contact the dedicated team at CRH Law on (07) 3236 2900 or visit our website at www.crhlaw.com.au. We look forward to being of further assistance to you.