A Special Disability Trust (“SDT”) for a family member with a severe disability or medical condition (“Beneficiary”) is a good way to provide:
security of housing during the Beneficiary’s life time with generous capital gains tax concessions;
funds for the reasonable care of the Beneficiary including medical expenses and some discretionary spending;
tax effective income without affecting the Beneficiary’s social security benefits; and
ability for older parents or relatives/friends to transfer cash or property to the SDT without triggering gifting provisions for those donors receiving the Age Pension.
For the purposes of this article we refer to a family member with a severe disability or medical condition as the Beneficiary.
The primary purpose of a SDT is to provide for the reasonable care and accommodation for the Beneficiary.
Who sets up a SDT?
A SDT is set up by a solicitor with experience in Estate Planning and trusts at the instigation of a parent/s or another close family member like a grandparent.
It can be created either:
- during the lifetime of the parent or other close family member; or
- in the parent’s Will so that all, or a portion, of the parent’s estate is paid into a SDT after their death.
Requirements for Beneficiary
The Beneficiary must meet the definition of severe disability under section 1209M of the Social Security Act 1991.
The Department of Human Services’ Special Disability Trust team will assess the Beneficiary against the legislated criteria for medical impairment, care needs and work capacity.
Who controls the SDT?
Two people (called trustees) are required to look after the assets of the SDT for the Beneficiary during the Beneficiary’s life time. Usually two family members are appropriate, but care needs to be taken to ensure they are trust worthy and there is no potential conflict that may jeopardise the genuine care of the Beneficiary.
A company controlled by two family members can also be the trustee of the SDT.
If there are no family members or friends who are suitable to control and look after the assets of the SDT, a professional trustee can be used for example, the NSW Trustee and Guardian (formerly known as the Public Trustee).
What assets can be put into the SDT?
There is no limit to the value of assets that can be held in the SDT – BUT to avoid affecting the Beneficiary’s social security benefits and the SDT’s tax benefits, the limits are:
- $694,000 (as at 1 July 2020) and indexed annually in line with the Consumer Price Index; and
- the Beneficiary’s principal residence.
Real estate or the residence that the Beneficiary lives in can be gifted to the SDT by a family member during their lifetime or after they die, as long as the Beneficiary has a personal right of occupation.
The residence can be sold and proceeds used to acquire a substituted residence for the Beneficiary as long as it is within the confines of the primary purpose ie. to provide for the care and accommodation of the Beneficiary.
The capital gains tax main residence exemption applies to the residence and no CGT is payable if the residence is sold within 2 years of the Beneficiary’s death.
How long does the SDT last and what happens when it ends?
The SDT ends on the death of the Beneficiary.
When that happens the remaining assets in the SDT are distributed as directed by the people who contributed the assets to the SDT in the first place. For example, remaining assets may be paid:
- back to the parent or family member;
- to the parent or family member’s estate;
- to the Beneficiary’s remaining siblings.
It depends on each individual situation.
There are strict rules as to how a SDT is to be set up and certain clauses that must be used.
If it fails to meet the criteria:
- the Beneficiary’s social security benefits may be affected;
- a higher rate of tax is imposed on the income generated by the SDT; and
- if the SDT owns the Beneficiary’s residence, stamp duty, capital gains and land tax consequences.
This is only a very brief outline of special disability trusts and further investigation and advice is strongly recommended if this sounds suitable for a member of your family with a disability.
For a PDF copy of this article or more detailed information on special disability trusts in Australia, please email firstname.lastname@example.org or see: