A Special Disability Trust (SDT) offers families a way to provide for a family member with a severe disability. This trust ensures their long-term care and accommodation needs are met while preserving their eligibility for social security benefits. This article covers the key aspects of Special Disability Trusts, including their benefits, gifting rules, and the impact on government benefits.
What is a Special Disability Trust?
A Special Disability Trust is a legal arrangement designed to provide for the future care and accommodation needs of a person with a severe disability. Specific legislation governs the trust, which offers social security means test concessions for the beneficiary. The primary objective of an SDT is to support the beneficiary without compromising their eligibility for government assistance programs.
Benefits of Special Disability Trusts
Protection of Government Benefits
One primary benefit of establishing an SDT is the protection of the beneficiary’s government benefits. Assets held within an SDT up to a specified concessional limit are exempt from the Centrelink assets test. As of 1 July 2023, this limit is $781,250. This exemption allows the beneficiary to maintain their eligibility for the Disability Support Pension and other related benefits.
Tax Benefits
Income generated by assets held within an SDT is taxed at the beneficiary’s marginal tax rate, often lower than standard trust tax rates. This provides significant tax savings, making SDTs an attractive option for managing assets intended for a person with a severe disability.
Asset Management
SDTs ensure responsible management of assets by trustee(s), who have a fiduciary duty to act in the best interests of the beneficiary. This is particularly beneficial if the beneficiary is unable to manage large sums of money due to their disability.
Protection from Creditors
Assets within an SDT are protected from creditors, ensuring that the funds are safeguarded for the beneficiary’s future needs. This protection extends to shielding the assets from being used to satisfy the beneficiary’s debts.
Impact on the Beneficiary’s Disability Pension
Exemption from Assets Test
For the principal beneficiary, all assessable trust assets up to the concessional asset value limit are exempt from the social security assets test. If a family member gifts a NSW property valued at $800,000 into an SDT and contributes an additional $781,000, most of these assets would be exempt from the beneficiary’s assessable assets for the disability pension. Specifically, the value of the principal residence would be entirely exempt, and $781,000 of other assets would fall within the concessional limit.
Income Test Exemption
Income generated from assets within the SDT is not assessable under the social security income test. This means any rental income or other income from an investment property within the trust will not impact the beneficiary’s eligibility for benefits.
Gifting Rules for Special Disability Trusts
Gifting rules primarily apply to the donor, not the donee (the beneficiary of the trust). Understanding these rules is crucial for anyone considering contributing assets to an SDT.
Standard Gifting Rules
Typically, gifts over $10,000 in a financial year or $30,000 over five financial years are subject to deprivation rules. This means that the excess amount is still counted as the donor’s asset for five years, potentially affecting their eligibility for social security benefits.
Concessions for Immediate Family Members on Existing Benefits
Immediate family members (including parents, legal guardians, grandparents, and siblings) who are within five years of Age Pension age or older and receiving a social security or veterans’ entitlement payment may receive concessions on the usual gifting rules when contributing to an SDT. These concessions mean that such gifts are not subject to the standard deprivation rules, allowing for the transfer of assets to the SDT without negatively impacting the donor’s social security benefits.
Establishing a Special Disability Trust in a Will
When considering the establishment of an SDT in a will, it’s important to draft clauses that clearly specify the intention to create the trust and the terms under which it will operate.
Conclusion
Special Disability Trusts provide a valuable mechanism for families to support their loved ones with severe disabilities without jeopardising their access to government benefits. By understanding the benefits, gifting rules, and legal requirements, families can make informed decisions that ensure long-term care and financial security for the beneficiary.
For more information on establishing and managing a Special Disability Trust, please consult with legal and financial professionals who specialise in this area. Additionally, you can refer to the Department of Social Services Special Disability Trusts page for comprehensive guidelines and updates.
