A thorough estate plan is even more important when you are dealing with vulnerable beneficiaries, such as someone who has a disability or is suffering from drug addiction or financial susceptibility. Considerations can include retaining pension eligibility, ensuing the beneficiary has sufficient funds for their needs and keeping the funds protected from wastage.
Two main options include a special disability trust (subject to eligibility) and a protective trust.
Special disability trust (“SDT”)
An SDT provides for the care and accommodation of a person with a severe disability as defined in the Social Security Act. They can be established during a person’s lifetime or pursuant to a Will provided the terms of the trust reflect the model trust deed endorsed by Centrelink.
SDTs can allow for income and assets means tested pension concessions. All trust income is excluded from the income test assessment for the beneficiary. An asset test assessment exemption applies, currently $700,250, and is indexed on 1 July each year. The principal place of residence is also an exempt asset. There are no limits on the amount of assets that can be held in the SDT, except that assets above the concessional limit will be included in the beneficiary’s assessable assets for determining eligibility for the disability pension.
Anyone can gift assets to the SDT except for the beneficiary and their partner, who may only gift a bequest or superannuation death benefit within three years of receipt. There is a gifting concession of up to $500,000 which applies to eligible family members of the beneficiary if that family member is also receiving or might be eligible for a government pension. Additional contributions made by immediate family members are assessed under the usual gifting rules.
The primary purpose of an SDT is for the reasonable care and accommodation costs of the beneficiary. However, the SDT may undertake discretionary spending not limited to the care and accommodation needs, provided it is for the benefit of the beneficiary. There is a limit on the amount of discretionary spending which is currently $12,500.
To ensure the interests of the beneficiary are protected, there are strict reporting requirements and the SDT must be reviewed annually. The trustee must provide annual financial statements to the Department of Human Services/Department of Veterans’ Affairs. An audit may be requested by certain people, including the beneficiary and immediate family members. The trustee can be either a professional trustee or two or more individuals.
An alternative option is a protective trust. This trust can be established where a beneficiary does not fit the eligibility requirements of a SDT and can be used for broader purposes as the trust is free of the restrictions imposed on SDTs. Protective trusts can also be prepared during a person’s lifetime but most are established in a Will. The asset and income exemptions that apply for an SDT do not apply to the capital or income of a protective trust.
It is not uncommon for the primary beneficiary of a testamentary trust to also be the trustee. However, with a protective trust, a separate trustee holds the trust assets for the beneficiary. They have the discretion to distribute income and capital to the beneficiary, subject to any terms specified in the trust deed or the Will. The terms can be specific in relation to how much can be distributed or what the distributions should be used towards. Alternatively, the terms can provide the trustee with wide discretion to create flexibility for changes in circumstances. In some circumstances control of the trust can be transferred to the beneficiary upon a certain age or other condition.
The choice of trustee is critical and two or more trustees may be preferable, such as a family member and an independent person such as an accountant. A professional trustee can be appointed if there is no one suitable.
To ensure that assets are protected for vulnerable beneficiaries, it is important that structures are put in place either during a person’s lifetime or on their death as part of their Will. These structures can protect a beneficiary losing their disability pension or funds being wasted. The type of trust to be established and the terms of the trust depend upon the needs and circumstances of the beneficiary.
If you consider that an SDT or protective trust may be suitable for your circumstances, please contact Perspective Law on 07 3839 7555.