Planning ahead for a loved one with a disability

Ensuring your hard earned assets pass to the next generation as effectively as possible is important to everyone.

When you have a child with disability, or a child who is otherwise unable to manage their own finances, a carefully drafted Will becomes even more important to ensure secure future care and accommodation needs are met.

There is no “one size fits all” approach when dealing with beneficiaries with special needs. However, a Special Disability Trust (SDT) or a Protective Trust (PT) are two methods designed to protect and manage funds for a beneficiary with a disability or special needs.

A carefully drafted Will can provide your Executor with flexibility to maximise the benefits available through these trust structures.

Legislation provides that when Services Australia assesses eligibility for a Disability Support Pension, a certain level of assets and income held within a Special Disability Trust is disregarded. This allows inherited assets to be held and used for the benefit of the disabled beneficiary without impacting their pension and associated benefits (within prescribed limits).

A Protective Trust also allows inherited assets to be held and used for the benefit of the beneficiary. However, assets held in a Protective Trust are not disregarded from the assets test for pension purposes.

Criteria for a special disability trust

There are strict criteria for establishing and maintaining a Special Disability Trust, including:

• There must be only one principal beneficiary, and that person must have a severe disability
• There must be more than one trustee appointed to manage the SDT (or alternatively a professional trustee may be appointed)
• The main purpose of the SDT must be to provide for the care and accommodation needs of the principal beneficiary (which restricts how trust funds can be used)
• The Trust Deed must contain compulsory clauses set out by Services Australia
• Annual reporting, including financial statements, is required

A Special Disability Trust is limited to circumstances where a beneficiary has a “severe disability”, which generally requires:

• The beneficiary is over the age of 16 (except in certain limited circumstances);
• The level of impairment qualifies them for a Disability Support Pension
• The disability would, if they had a sole carer, qualify the carer for a Carer Payment or Allowance
• The disability prevents (or is likely to prevent) them from working more than seven hours per week at award wage.

The benefit of a Special Disability Trust is that the beneficiary’s principal residence and up to $832,750 (indexed annually) may be exempt from the assets test for pension purposes.

Criteria for a protective trust

Although substantial benefits can be gained from a Special Disability Trust, the restrictions on how funds can be used may make it worthwhile to consider including a Protective Trust in your Will instead of an SDT – or, in some cases, incorporating both trusts to maximise the benefits available (where circumstances allow).

Importantly, an inheritance held within a Protective Trust does not receive the same exemption from the beneficiary’s assets test for pension purposes. However, there is significantly greater flexibility in how funds may be applied.

Generally, the use of funds is at the discretion of the Executor or Trustee of your Will, or in accordance with specific directions you include in your Will.

Unlike a Special Disability Trust, a Protective Trust does not require the beneficiary to have a severe disability. It may instead be used to protect funds for a beneficiary who is otherwise unable to manage their own finances.