18 Apr Things to know about Special Disability Trusts
Special Disability Trusts
Special Disability Trusts (SDTs) were introduced in 2006 to assist families and carers make private financial provisions for the current and future care and accommodation needs of a family member with a severe disability. They provide the donor and SDT beneficiary with Social Security concessions under the gifting and deeming rules.
This article outlines the Social Security concessions and requirements as well as the taxation implications applicable to SDTs. While financial advisers may identify the suitability of an SDT for a client, the services of a legal professional will be required to establish the trust and make amendments to the trust as required.
Who can establish a Special Disability Trust?
Anyone can establish a trust for an eligible severely disabled beneficiary. There are four roles in establishing a trust
- The settler: The settler is the person or company who, with the trustee(s), establish the trust by contributing an initial amount and executing a trust deed. After the trust is set up, assets or cash to purchase assets can then be transferred into the trust. You can choose your accountant, solicitor or a distant family member as a settler, who will not have an ongoing role in the operation of your trust. Your settler cannot be a beneficiary, contributor or trustee of the trust.
- The appointor: An appointor can be any person or corporation who is not the beneficiary or Settler. Your appointor usually indirectly controls your trust and hires (and can dismiss) the trustee(s). Your appointor is not responsible for the day-to-day operation of your trust.
- The trustee: The trustee manages the day to day activities of the trust, conducting business on behalf of the trust, including making investment decisions aimed at increasing the value of the assets. Trustees, among other things, must be fully acquainted with the terms of the trust and their responsibilities, know what the assets and liabilities of the trust are, keep proper accounts and prepare tax returns.
- The beneficiary: The beneficiary is the person who benefits under the trust. They have no right or claim to any of your 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 under the trust deed.
What are the main characteristics of a Special Disability Trust?
A Special Disability Trust must meet the following requirements:
- You can have only one beneficiary
- Your beneficiary must meet all eligibility criteria.
- The primary purpose must be to provide for the accommodation and care needs of the beneficiary
- You need to have a trust deed that contains the clauses
- You must have an independent trustee
- You need to comply with the investment restrictions
- You need to provide annual financial statements, and should be audited independently
Social Security concessions
Broadly, the Social Security concessions include:
- Gifts of up to $500,000 combined by immediate family members are excluded from deprivation rules and asset testing.
- SDT assets valued at up to $636,750 are exempt from the Social Security assets test for the beneficiary.
- Income from the SDT is excluded from the income test, and deeming does not apply to the assets within the SDT.
- The beneficiary’s home, if held in the SDT, will be excluded from means testing.
Special Disability Trusts – Social Security requirements
In order to access the Social Security concessions, the SDT must meet a number of requirements including:
- The primary purpose of the trust must be to meet reasonable care and accommodation needs of the beneficiary.
- The trust may have other purposes that are both ancillary to the primary purpose or necessary or desirable to achieve that purpose, or primarily for the benefit of the beneficiary.
- The trust must have only one beneficiary
- Where the beneficiary is 16 years or over they must have an impairment that would qualify the person for a disability support pension or DVA equivalent
- Where the beneficiary is under the age of 16, among other key conditions, a treating health professional must certify that the beneficiary will need personal care for six months or more and that a similar or increased level of care will be required in the future.
What are reasonable care and accommodation needs?
A care need is a reasonable care need if it:
- arises as a result of the beneficiary’s disability, and
- relates to beneficiary’s medical and dental costs, including health insurance and medical practitioner services, or
- relates to daily care fees and certain other fees charged by an approved care provider
An accommodation need is a reasonable accommodation need if it:
- arises as a result of the beneficiary’s disability, or
- relates to the lease or purchase of a property for the beneficiary’s accommodation needs, or
- is for the payment of rates, taxes or maintenance of property that is owned by the SDT and used for the beneficiary’s accommodation, or leased at market value and the rent is used for the beneficiary’s benefit
The SDT cannot be used to pay an immediate family member for providing care to the beneficiary or to purchase or lease property from an immediate family member.
Your SDT can spend up to $11,250 per financial year on discretionary items not related to the beneficiary’s care and accommodation needs, provided it is for the benefit of the beneficiary. Discretionary spending can include items relating to the beneficiary’s health, wellbeing, recreation, independence and social inclusion.
Are there any asset limits?
Technically there is no limit on the value of assets that can be held by an SDT. However, in practice the primary purpose requirements may limit access to funds within the SDT.
To avoid these types of access issues a separate trust (eg discretionary trust) may be established for the funds above the asset test exemption limit (currently $636,750).
- Only ‘immediate family members’ can make use of the gifting concessions. Immediate family members include parents (including adoptive and step parents), legal guardians, grandparents and brothers and sisters (including adoptive, step and half siblings).
- The beneficiary or their partner can only make use of the gifting concessions under limited circumstances, such as where the gifted asset is received under a Will.
- The $500,000 limit applies to all immediate family members combined.
- The gifting concessions only apply to immediate family members who are of Age Pension age or Service Pension age and receiving a social security pension or service pension or veterans’ income support supplement. The concession does not apply to a person receiving certain other income support payments such as Newstart Allowance.
- Capital gains or losses arising from assets gifted directly to an SDT for no consideration will be disregarded. The exemption also applies to assets passing from a deceased estate to an SDT.
Taxation of SDTs
SDTs are largely taxed in the same manner as other types of trusts, such as family trusts. There is however a significant point of difference in that any unexpended income is taxed at the beneficiary’s marginal tax rate (MTR), rather than at the highest MTR.
SDT’s are also able to access the capital gains tax (CGT) main residence exemption where the beneficiary’s home is held within the trustee. This exemption applies in certain circumstances where the SDT beneficiary passes away and the property is subsequently disposed of within two years of the beneficiary’s death.
If you are considering a special disability trust, the first step should be to speak to a financial adviser about whether this strategy would suit your investment goals, time frame and feelings about risk. This type of trust can be a powerful way to increase government benefits and manage your wealth effectively, ensuring you and your loved one will be able to live the life during a serious medical condition. However, it’s important to seek the advice of a professional who is experienced in such matters and can offer you advice based on your unique circumstances.
If you’d like to speak to a specialist about how we can help build your special disability trust, get in touch 03-8658-8875 or click the button below to book an appointment
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