Planning is essential for the long-term care and accommodation needs of a family member with a severe disability.
The planning process usually starts with a review of the family’s needs, financial capacity, estate planning, tax planning, social security entitlements and the special needs of the family member.
An option to consider is the establishment of a Special Disability Trust (SDT). An SDT is a trust established in accordance with Part 3.18A of the Social Security Act 1991 of Australia, for a family member with a severe disability, known as the principal beneficiary. An SDT can help ensure the ongoing needs of the principal beneficiary continue to be met, even when family members can no longer provide assistance.
An SDT enables family members to contribute money and/ or property into the trust to be used for the reasonable care and accommodation needs of the principal beneficiary, without impacting their entitlement to a Disability Support Pension.
This type of trust also provides concessions under the social security means tests for those who contribute to the SDT, whilst providing asset protection, tax concessions, succession planning and other benefits when used in the right circumstances. It can be established by trust deed during the life of the donor or by Will.
Benefits of an SDT include the trust being able to spend up to $12,000 (2018-2019) on discretionary items not related to the care and accommodation needs of the beneficiary. A gifting concession of up to $500,000 combined is available for eligible family members of the principal beneficiary to contribute to an SDT and not be affected by the pension gifting rules.
Tax concessions available to an SDT include the net income generated by an SDT and is taxed at the principal beneficiary’s marginal tax rate, instead of trust penalty rates, and the allowance of CGT exemption for the recipient of the principal beneficiary’s main residence (if disposed of within two years of the beneficiary’s death).
As SDTs are regulated by a stricter regulatory regime than other trusts, it is imperative that the SDT is setup correctly, the principal beneficiary continues to meet the definition of having a severe disability and the trustee clearly understands and meets the ongoing compliance requirements of the trust.