Setting up special disability trusts
Parents and immediate family members will often seek to provide financial assistance to help a disabled family member. One option can be to establish a Special Disability Trust (SDT).
Concessional Centrelink and tax treatment may apply to the income and assets of the trust for the disabled person and to the gifts made by family members.
Whilst limits apply for the amounts that can be exempted, these exemptions combine to make a SDT an attractive option for this purpose.
A SDT is a trust established (primarily for succession planning) to provide for the current and future care and accommodation needs of a person with a severe disability or medical condition.
The general approach is that the trust can pay for any care, accommodation, medical costs and other needs of the beneficiary during their lifetime.
‘Special’ refers to the social security and tax treatment of the trust and is not a reference to the beneficiary’s disability.
The SDT must satisfy a number of criteria to receive concessional social security treatment.
While the original provisions focused primarily on families providing for a disabled child from a Centrelink perspective, it is not necessary for the disabled family member to be receiving income support.
This type of trust may provide an opportunity for parents to set aside money for a disabled child, providing peace of mind that the child is provided for without affecting the parent’s own entitlements.
Some of the benefits for the parents (or immediate family member) gifting the assets are:
- Peace of mind that the cost of the disabled person’s care and accommodation will be funded from trust assets,
- Ability to gift assets and receive concessional Centrelink treatment, and
- Gifting to a SDT will also reduce the level of personal assets, which may:
- Increase Centrelink payments
- Remove assets from their estate, particularly if the estate could be contested.
The benefit for the beneficiary is that income and assets are being used to provide care and accommodation, whilst having a minimal impact on their own Centrelink entitlements.
A Special Disability Trust must meet the following requirements:
- Have only one beneficiary (that is the person for whom the trust is established),
- The beneficiary must meet all eligibility criteria,
- The primary purpose must be to provide only for the accommodation and care needs of the beneficiary,
- Have an independent trustee, or alternatively have more than one trustee,
- Comply with the investment restrictions,
- Have a trust deed that contains the clauses as set out in the Model Trust Deed,
- Provide annual financial statements, and
- Conduct independent audits when required.
Centrelink income & assets test
Principal beneficiary
Income or distributions received by the beneficiary from a SDT are not assessable under the Centrelink income test. This exemption also applies to undistributed income of the SDT.
In addition, assets up to the value $657,250 (2017/18) will be excluded from the assets test for the principal beneficiary.
Amounts above this threshold are counted towards the asset test. This threshold is indexed on 1 July each year.
If the beneficiary’s principal home is held in the trust, it is still treated as an exempt asset.
Gifts by immediate family members to special disability trust
Family members over age pension (or service pension age)
The first $500,000 money (or assets) transferred into the SDT will be excluded from gifting rules for any immediate family member who is over age/service pension age and receiving either the age pension, service pension or income support supplement.
Any gift must be an unconditional gift, that is to say with no conditions attached for the return of the money at any point in the future. The $500,000 is not indexed.
If the above conditions are met, the transfer is not treated as a gift and does not trigger any deprivation. Amounts above the allowable limit are assessed under the normal gifting rules.
Example
Terry (age 65) receives the age pension and his wife Joan (age 59) receives Newstart allowance. They transfer $100,000 of their assets to a SDT for their son.
As Terry is over age pension age and the gifted amount is less than $500,000, the transfer is not assessed under gifting rules.
Their assessable assets will reduce by the $100,000 transferred and may increase their respective payments. The SDT is also an exempt asset for the son.
If more than one family member makes gifts into the trust, the $500,000 exclusion limit applies as a total for all excluded gifts made to SDTs for the benefit of a particular person.
Example
Henry, age 65, receives a part age pension. He transfers $400,000 in February to a SDT for his disabled son, Tony.
Henry’s father Max, age 87, transfers $200,000 to the same SDT in May. Max receives the age pension.
The allowable limit of $500,000 is reduced by Henry’s transfer as this was made first. Max’s transfer is assessed against the remaining threshold of $100,000. This means $100,000 is exempt from gifting for Max. The remaining $100,000 is assessed under the gifting rules and Max will have a deprived asset.
Family members under age pension (or service pension age)
Family members who are under age pension age (or service pension age) and are not receiving any income support can still give a gift to the SDT.
These gifts will not count against the $500,000 limit. However, such gifts may be assessed under the gifting rules if they are made within 5 years of applying for their income support entitlement.
Example
Geoff has a severe disability and his father Jeremy has established a SDT for him. In November 2001 Jeremy, aged 58, gave $500,000 to the trust. Jeremy cannot apply to Centrelink for the gifting concession as he is below age pension age.
In August 2016, Jeremy gives another $500,000 to the trust. The trust has not received any other contributions since Jeremy’s initial contribution in 2011.
In 2017, Jeremy turns 65 and applies for the age pension. Jeremy’s gift in 2011 is disregarded because it was more than five years prior to his claim for the age pension.
His gift in 2016 is within five years of his claim and as he is an immediate family member his gift is eligible for the gifting concession.
Therefore, his gift in 2016 will be disregarded for social security means test purposes.
With respect to the $500,000 gifting limit, the timing of the gifts is important.
Gifts to a SDT made by a family member who is receiving an age pension (or service pension) are deemed to have been made before a gift made by a family member who is not in receipt of an age pension (or service pension).
Example
Further to the example of Geoff above. Assume Geoff’s grandmother Hilary puts in $200,000 into Geoff’s trust in 2017. Hilary is receiving the age pension. The gifting then appears as follows:
- 2011 - Initial gift by Jeremy (Geoff’s dad) before age pension age: $500,000
- 2016 - Additional gift by Jeremy before age pension age: $500,000
- 2017 - Gift by Hilary (grandmother) receiving age pension: $200,000
In 2017 when Jeremy turns 65 and makes a claim for an age pension, the initial gift 2011 will be disregarded because it was more than 5 years before a claim for the age pension, however for the 2016 gift only $300,000 will be exempt from the gifting provisions, the remaining $200,000 will be assessed as a deprived asset.
This is the case even though Jeremy’s gift to the SDT was before Hilary’s, because at the time of making their gift Hilary was receiving the age pension and Jeremy was not.
Gifts by non-immediate family members
Anyone other than the beneficiary or their spouse can contribute to a SDT. In doing so, these contributions will not be subject to the gifting concessions that apply to immediate family members.
Tax and a SDT
Changes to the way a Special Disability Trust is taxed were announced in the 2009/10 and 2011/12 Budgets.
Taxation measures include:
- From 1 July, 2008 unexpended income of a SDT is taxed at the beneficiary’s personal income tax rate, rather than the highest marginal tax rate*, and'
- From 1 July, 2006:
- A capital gains tax exemption is allowed for any asset donated into a SDT,
- A capital gains tax main residence exemption is allowed for Special Disability Trusts,
- A capital gains tax exemption is allowed for the recipient of the beneficiary’s main residence, if disposed of within two years of the beneficiary’s death, and
- Equivalent taxation treatment amongst Special Disability Trusts established under different Acts is ensured.
* Prior to this change, unexpended income of a Special Disability Trust was taxed at the highest marginal tax rate.
In conclusion
So whilst not the only solution to planning for a person with a severe disability, SDTs offer a tax effective and Centrelink friendly option that justify due consideration for clients and/or their families that may be effected by (or have a close relative effected by) a severe disability.
Richard Press is Fiducian's technical manager.
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