What is a Special Disability Trust, and should I have one in my Will?

What is a Special Disability Trust?

A Special Disability Trust (‘SDT’) is a relatively new type of Trust where the assets of the Trust are excluded from the beneficiary’s asset test for the purposes of calculating their disability support pension, which is capped at $724,750.00 (until 30 June 2023, indexed each year).

Therefore, a person with a severe disability is able to receive assets and income – for example, an inheritance from a parent – without it reducing their disability support pension payments.

Additionally, an SDT is advantageous as a way of protecting a vulnerable person’s inheritance because the Trust must be managed by at least two Trustees (or one independent professional) and the assets and income in the SDT can only be used for the reasonable care and accommodation needs of the beneficiary, with the exception of an annual allowance of $12,500.00 (indexed annually) for discretionary spending.

Who is eligible for a Special Disability Trust?

Broadly, a person over the age of 16 will qualify for an SDT if they:

1. are in receipt of a disability support pension;
2. cannot work for more than 7 hours a week earning at least the national minimum wage; and
3. need ongoing support services such as a carer or group home.

The Services Australia Special Disability Trust Team will assess the person to determine whether they are eligible for an SDT.

An SDT can be established either during the support person’s lifetime or in their Will after their death.

What are the advantages and disadvantages of a Special Disability Trust?

The advantages and disadvantages in establishing an SDT are summarised as follows:

Advantages

Asset protection:

• The assets and income within the SDT will be managed by two people other than the beneficiary or one professional, and such assets and income can only be used for the essential needs of the beneficiary.
• The Trustees managing the SDT must maintain financial records for the Trust, which ensures there is no abuse of funds.
• If the SDT is established during the support person’s lifetime, the assets and income within that trust will not form part of their estate, which means they will be protected from any Will dispute.

Tax concessions:

• There are capital gains tax (“CGT”) and stamp duty exemptions on a transfer of property to an SDT.

Pension concessions

• Any income and assets held by the SDT within the cap amount (indexed annually) will not affect the beneficiary’s disability pension.
• The beneficiary’s main residence is excluded from the cap amount.
• Immediate family members who are receiving or will receive a Centrelink pension can transfer up to $500,000.00 (jointly) into the SDT without those funds being included in their pension asset test, as would normally be the case under the gifting rules.

Disadvantages

Administration and cost

• There are initial set up costs and ongoing administration costs associated with maintaining an SDT. However, if there are substantial funds held in the SDT, the benefits of having a SDT in place far outweigh the costs in most cases.
• An assessment is required to ensure that the beneficiary is eligible, which may be stressful for the beneficiary, or the family members involved.
• The Trustees must submit annual financial statements and tax returns for the SDT (which would be prepared for most Trusts anyway). Your Accountant should be able to assist you with this.

Limited investment powers

• There are restrictions on the types of dealings an SDT can have with an immediate family member and other related parties.
• Additionally, an SDT is prohibited from borrowing funds and all contributions made to the SDT must be unconditional.

If you are planning to provide the beneficiary with more than the cap amount, we generally recommend a combination of an SDT and a more flexible discretionary trust.

If you require advice or further information in relation to any of the matters discussed in this article, please contact our Wills, Estates and Succession Planning team.