What is a Special Disability Trust?
A Special Disability Trust is a popular tool used by Estate Planners for clients who are parents or immediate family members of a person with a severe disability or medical condition. The Special Disability Trust pays for the current and future care, accommodation, medical costs and other needs of the principal beneficiary during his or her lifetime.
A Special Disability Trust can be established by a person either during his or her lifetime (inter-vivos) or through a Will (after death).
NO ASSETS TEST
One of the main benefits of a Special Disability Trust is that it can help preserve the Disability Support Pension entitlements and associated benefits that a principal beneficiary receives.
Assets held in a Special Disability Trust up to the concessional asset value limit ($781,250 as at 1July 2023) are exempt from the usual assets test for the pension entitlement of a principal beneficiary. Also, no income from a Special Disability Trust is taken into account under the principal beneficiary’s income test.
For the immediate family members of the principal beneficiary who are in receipt of a pension – whether age pension or service pension, there is a gifting concession available where gifts up to a combined amount of $500,000 (unindexed) can be made to a Special Disability Trust without pensions being penalised under the gifting rules. A Special Disability Trust must exist before the gift is made.
NO CAPITAL GAINS TAX
A further significant benefit of a Special Disability Trust is that any capital gain or loss, from a capital gains tax (CGT) event that happens when an asset is transferred for no consideration to a Special Disability Trust, is disregarded. The value of the CGT exemption is uncapped.
Further, in a subsequent sale of the asset by the Trustee, the cost base of the property in the hands of the Trustee is deemed to be the market value of the property when the Special Disability Trust acquires it.
INCOME TAX BENEFITS
For income tax purposes, all income generated in the Special Disability Trust, including unexpended income; is taxed at the principal beneficiary’s marginal rate, rather than the highest marginal rate.
STAMP DUTY EXEMPTION
There are stamp duty concessions and/or exemptions available when a dutiable asset (real estate) is transferred into a Special Disability Trust. In Victoria, s 38A of the Duties Act 2000 (Vic) provides a stamp duty exemption for a transfer of property that will be the primary residence of the principal beneficiary into a Special Disability Trust up to the value of$1,500,000. There are however some additional requirements that must be met with respect to the transfer of the property.
There are no restrictions on who can establish a Special Disability Trust for an eligible severely disabled beneficiary. There are certain requirements set out in s 1209M of the Social Security Act 1991 (Cth) such as:
1. There can be only one principal beneficiary;
2. The principal beneficiary must have the following:
a. an impairment that would qualify the person for a disability support pension;
b. a disability that would, if the person had a sole carer, qualify the carer for carer payment or carer allowance;
c. a disability as a result of which either he or she is not working and has no likelihood of working for more than 7 hours a week for a wage that is at or above the relevant minimum wage.
The requirements of a principal beneficiary are different for someone who is under 16 years of age.
Before establishing a Special Disability Trust to hold assets for the principal beneficiary, it is necessary to receive confirmation from Centrelink that the intended beneficiary qualifies. If that is not done, it could be counter-productive and the assets could be trapped in a Special Disability Trust with its stringent requirements and restrictions on expenditure and investments.
We recommend that you obtain financial or legal advice before establishing a Special Disability Trust. Please telephone our Estate Planning Team on 9870 9870 if we can be of any assistance in this regard.