SPECIAL DISABILITY TRUSTS TO PROTECT DEPENDENTS – A CASE STUDY
Raising and caring for children is challenging at the best of times. For parents with a disabled child, there is the added concern to ensure the child is cared for after the death of both parents.
How can parents provide financial security for a disabled child after the death of both parents?
A well drafted Will can incorporate a Special Disability Trust to take effect on the death of the surviving parent.
Special Disability Trusts were created by the Federal Government in 2006 to allow parents and other family members to provide assets for a disabled person with a severe disability, without affecting the disabled person’s entitlement to the disability support pension.
How does a Special Disability Trust work?
A Special Disability Trust can hold a maximum of $578,500.00 (this amount is indexed annually) and apart from $10,250.00 per annum, income and capital of the trust cannot be used for the disabled person’s general day to day living expenses. The trust must be used for the disabled person’s reasonable:
- Care needs which arise as a result of the disability, e.g. mobility aids and a modified motor vehicle;
- Accommodation needs which arise as a result of the disability, e.g. the purchase of a modified residence or the payment of an accommodation bond in a residential care service.
The value of assets held outside the Special Disability Trust for the benefit of the disabled person will not affect his/her entitlement to the disability support pension as follows:
- If the disabled person owns a home $186,750.00;
- If they do not own a home $321,750.00.
Thus, at present, the maximum parents can leave for the benefit of a disabled child is $900,250.00 ($578,500.00 & $321,750.00).
Meet Claire and Peter
- Claire and Peter have three children. Alex aged 50 and Elizabeth aged 45, both are married with children. Their son Robert aged 55 is severely disabled and lives with them at home.
- Claire and Peter have assets totaling approximately $2.4 million. They wish to divide their estate equally between the three children, meaning each child would receive approximately $800,000.00.
- They complete professionally drawn Wills.
- They appoint a Trustee company as trustee of Robert’s share of the estate as they do not wish to impose the day to day management of his trust on Alex and Roberta due to their family commitments.
- The Will gives the trustee the option to divide as appropriate Robert’s share between a Special Disability Trust and an all needs protective trust. The purpose of the all needs protective trust is to provide for Robert’s day to day needs not permitted to be paid from the Special Disability Trust e.g. toiletries, petrol, vehicle maintenance, registration and insurance.
- On the current values of their estate, the trustees would pay from Robert’s 1/3 share of the estate ($800,000.00), $587,500.00 into the Special Disability Trust with the balance ($212,500.00) into the all need protective trust.
- As a result of careful planning, Claire and Peter have ensured financial security for Robert through their Wills without him losing his entitlement to the disability support pension.
- If the Wills did not incorporate a Special Disability Trust Robert would have lost his entitlement to the disability support pension.
- The entitlements of Alex and Elizabeth were left in optional testamentary discretionary trusts for asset protection and tax advantages.
Even where parents have assets in excess of $900,000.00 their Wills should provide the option of establishing a Special Disability Trust as it may be that by the time of the death of the surviving parent the amount that can pass into a trust has increased (due to indexation) or the value of the parents’ estate may have diminished over time.
The wording of the Special Disability Trust must follow that prescribed by the Social Security Rules.
Special Disability Trusts can also be set up by parents in their lifetime.
With careful planning, parents of a disabled child can rest assured that their child will have financial security.
For further information contact our team on (08) 9368 1337
Information provided by Willcraft Estate Planning Pty Ltd, An Incorporated Legal Practice.