What is a Special Disability Trust?
The Special Disability Trust, introduced in 2006 by the Federal Government, allows immediate family members and legal guardians to make a private financial provision for the future care and accommodation needs of a relative with a severe disability. An immediate family member of the severely disabled person can establish a Special Disability Trust in their will or during their life.
What is the primary purpose of a Special Disability Trust?
The primary purpose of the trust is to protect the interests of the person with severe disabilities. Trust expenditure is restricted to reasonable and related to the care and accommodation needs of the person with severe disabilities, costs associated with administration of the trust and payments primarily to benefit the severely disabled person also known as the principal beneficiary.
What are reasonable care and accommodation costs?
The primary purpose of a Special Disability Trust is to meet the reasonable care and accommodation needs of the principal beneficiary.
A care need is considered reasonable if:
it arises because of the disability or
it is for any medical or dental related costs of the principal beneficiary or
it is to pay fees in an approved residential care service, or an institution, hostel, or group home operating under a specified Commonwealth agreement and the need is met in Australia.
Examples of Reasonable care expenses are:
Vehicle modifications
Mobility aids
Sleeping and sensory aids
Communication devices
Specialised food
Medical and dental expenses, including health insurance.
An accommodation need is considered reasonable if the need arises because of the disability of the principal beneficiary.
Reasonable accommodation needs include:
payment for the purchase, or rental of a residence (or interest in a property) for the principal beneficiary’s accommodation
payment of rates and taxes on the property and for its maintenance
modifying an existing residence to suit the needs of the principal beneficiary.
The purchase and maintenance of an investment property, or an interest in an investment property, is also considered a reasonable care and accommodation cost where:
the investment property is rented at market value and
the income from the rent is used to benefit the principal beneficiary.
What are the major benefits of a Special Disability Trust?
Trust assets with a value of up to $694,000 and income from the trust may be disregarded for the purposes of the principal beneficiary’s social security payments.
The home of the principal beneficiary, if owned by the Special Disability Trust, is not an assessable asset and is not included in the asset value limit of $694,000.
The net income produced by the Special Disability Trust is taxed at the principal beneficiary’s adult personal income tax rates
Immediate family members can collectively gift up to $500,000 without adversely affecting their own Centrelink or Department of Veteran Affairs payments.
Disposal of a dwelling owned by a Special Disability Trust and used by the beneficiary as their main residence is included under the Capital Gains Tax main residence exemption rules.
Unexpended income of a Special Disability Trust is taxed at the principal beneficiary’s personal income tax rate, rather than the highest marginal tax rate.
Who can be the principal beneficiary of a Special Disability Trust?
A person with a severe disability who meets certain Centrelink or Veteran’s Affairs requirements can be a beneficiary of a Special Disability Trust. The person might have severe physical, intellectual, psychiatric or behavioural disability or medical conditions. Principal beneficiary of a Special Disability Trust has the meaning given by section 1209M of the Social Security Act 1991 (Cth).
Definition 1
A person who has reached 16 years of age and:
whose level of impairment would qualify the person for Disability Support Pension or who is already receiving a Department of Veterans’ Affairs (DVA) Invalidity Service Pension or DVA Invalidity Income Support Supplement
with a disability that would, if the person had a sole carer, qualify the carer for Carer Payment or Carer Allowance
with a disability and cannot work more than 7 hours a week in the open labour market.
Definition 2
A person who has reached 16 years of age and:
whose level of impairment would qualify the person for Disability Support Pension or who is already receiving a DVA Invalidity Service Pension or DVA Invalidity Income Support Supplement
who is living in an institution, hostel or group home where care is provided for people with disabilities and funding is provided under an agreement between the Commonwealth, states and territories
with a disability and cannot work more than 7 hours a week in the open labour market.
Definition 3
A child younger than 16:
who is a person with a severe disability or a severe medical condition
with a carer who has been given a qualifying rating of intense under the Disability Care Load Assessment (Child) Determination for caring for that person
who has had a treating health professional certify in writing that, because of that disability or condition either:
the person will need personal care for 6 months or more
the personal care must be provided by a specified number of persons.
What is a trust?
A trust, including a Special Disability Trust, is a legal relationship between a trustee and a beneficiary.
What are the key roles of a Special Disability Trust?
There are 4 key roles in every Special Disability Trust:
Settlor - a person or a company establishing the Special Disability Trust by contributing an initial amount into the trust – usually $10. The settlor cannot be the principal beneficiary or the trustee of the Special Disability Trust.
Appointor - The appointor has ultimate control of the Special Disability Trust because they can appoint and remove the trustee. An appointor can be any person or corporation who is not the settlor or the beneficiary.
Trustee - The trustee manages the day to day running of the Special Disability Trust and decides about the day to day operations and investments of the Special Disability Trust. Anyone except the beneficiary can be the trustee if they meet the legislative requirements.
Principal Beneficiary - The principal beneficiary is the severely disabled person who benefits from the Special Disability Trust.
What are the compliance requirements of a Special Disability Trust?
To be a compliant trust the Special Disability Trust must:
have only one principal beneficiary, who must be severely disabled
provide as a primary purpose for the accommodation and care needs of the principal beneficiary
have a trust deed that contains the clauses set out in the model trust deed
have an independent trustee, or have more than one trustee (e.g. 2 or more family members)
comply with the investment restrictions
comply with the expenditure restrictions for purposes other than the primary purpose
provide annual financial statements
conduct independent audits when required
not pay immediate family member of the principal beneficiary to care for the principal beneficiary.
A person with severe disability can have only one Special Disability Trust established for their benefit.
Expenditure restrictions for other purposes
Besides meeting the reasonable care and accommodation needs, a trust may have discretionary spending for other purposes such as for food, vehicle, health, well-being, recreation, independence and social inclusion of the principal beneficiary. The maximum value of income and assets that can be applied for other purposes is $12,250 for the 2019-20 financial year. The limit does not include expenditure on the maintenance and the practical administration of the trust.
Who is an immediate family member who can donate to the trust?
For the purpose of an Special Disability Trust, an immediate family member of the principal beneficiary includes:
natural, adoptive or step parents
legal guardians (a person who is, or was, the legal guardian of the person with a severe disability while that person was under the age of 18 years)
grandparents
brothers and sisters including half blood and step and adoptive siblings.
The principal beneficiary’s partner cannot transfer assets to the Special Disability Trust unless they leave a gift in their will or the Special Disability Trust receive the partner’s superannuation death benefits.
I am the appointor of a Special Disability Trust. Who will control the trust if I die?
The appointor is the person who ultimately controls the Special Disability Trust.
If you are the appointor of a Special Disability Trust you can appoint a successor appointor by giving a notice to the trustee of the Special Disability Trust or by appointing a successor appointor in your will.
Who can be a trustee of the Special Disability Trust?
A trustee for the Special Disability Trust can be an individual or a corporation. Parents, siblings and friends of the beneficiary over 18 years who are Australian residents can be trustees.
An individual or a director of a trustee corporation must:
be an Australian resident
not have been disqualified at any time from managing corporations under the Corporations Act 2001
not have been convicted of an offence or dishonest conduct against a law of the Commonwealth, State, Territory or a foreign country
not have been convicted of an offence under the Social Security Act 1991, or the Social Security (Administration) Act 1999, or the Veterans’ Entitlements Act 1986.
A professional trustee company or a legal, accounting or financial planning organisation can be appointed as a trustee of the Special Disability Trust.
When does the trust end?
A Special Disability Trust will only exist during the beneficiary’s lifetime.
Events that will cause the trust ceasing to be a Special Disability Trust include:
death of the principal beneficiary
winding up of the trust
a breach of the Special Disability Trust requirements.
What happens with the Special Disability Trust assets if the principal beneficiary dies?
If the principal beneficiary dies the Special Disability Trust is dissolved and the capital is returned to the immediate family members in the proportion it was given. A family member can alternatively nominate a person or persons to receive their contribution balance. The value of any assets that cannot be returned, because they have been expended by the trust, are then regarded as deprived assets if less than 5 years has passed since the assets were gifted to the trust.