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Beneficiaries with special needs

Providing adequate protection for beneficiaries with special needs can be a sensitive and complex task. This fact sheet outlines some of your options.

Protective Trusts

A trust is a common vehicle for passing property to family members. The key feature of a trust is that assets are held by one or more persons (trustees) for the benefit of another person or class of people (beneficiaries).

You can establish one or more trusts in your Will, and these are referred to as testamentary trusts.
In the case of a beneficiary with special needs, it will often be problematic to give complete responsibility for a testamentary trust to the beneficiary personally.

A “Protective Trust” in your Will may be appropriate for beneficiaries who:

  • are severely disabled
  • have a disability, although not severe, which impacts on their ability to look after their affairs (for instance, autism, aspergers, etc)
  • have an addiction (e.g. gambling, drugs)
  • are otherwise considered ‘vulnerable’

In a typical Protective Trust:

  • control is given to an independent trustee, or to the beneficiary together with an independent trustee. This ensures that the inheritance you are giving is used and maintained appropriately
  • the trustee(s) have the power to use the income and capital of the trust with broad discretion as to purposes, for the ongoing benefit of the beneficiary
  • each financial year, sufficient income and capital is distributed to the beneficiary to meet the beneficiary’s needs, as determined by the trustee(s). Any remaining income is either accumulated within the trust or distributed to other beneficiaries as directed by the Will
  • upon the death of the beneficiary with special needs, the capital remaining in the protective trust is transferred to other nominated beneficiaries
  • if so desired by the Will maker, the beneficiary may become entitled to the capital of the trust on reaching a specified age or meeting another condition specified in the Will. At this time control of the trust can be transferred to the beneficiary, if appropriate.

Special Disability Trusts

If you have a severely disabled child or family member, another good option is to establish a Special Disability Trust (“SDT”).

A SDT can be set up during your lifetime, but can otherwise be incorporated into your Will.

The terms of the SDT must specify one “principal beneficiary” who is to benefit from the trust. This person must meet the criteria of “severe disability”, including that he or she suffers a level of impairment which qualifies him or her for a Centrelink pension.

The trustee of a SDT is able to:

Couples with dependent children, where assets and/or life insurance (within or outside Superannuation) are sufficient; for example:

  • pay for the principal beneficiary’s care, accommodation, medical and dental expenses, including membership costs for private health funds
  • pay the maintenance expenses of the trust’s property assets
  • spend up to $10,250 in a financial year on discretionary items not related to the care and accommodation needs of the principal beneficiary.

The main advantages associated with having a Special Disability Trust are:

  • a one-off gifting concession of up to $500,000 combined is available for eligible family members of the principal beneficiary, to make additional contributions to the trust
  • an indexed assets test assessment exemption ($596,500 for 2013/14). Assets under this amount are not included in calculating the principal beneficiary’s Centerlink benefits
  • a SDT’s income is generally taxed at the beneficiary’s personal income tax rate(s), rather than at the highest marginal tax rate.

Contributions or gifts of assets to any value can be made to this type of trust at any time by almost anyone. However, the rate of a contributor’s Centrelink payment may be affected if the contribution is worth more than the allowable concessional amount or if the contributor does not meet the required eligibility criteria.

A SDT must have an independent trustee, or alternatively have more than one trustee. The trustee(s) must comply with the investment restrictions, provide annual financial statements and conduct independent audits when required.

Due to the legislative requirements of a SDT, care should be taken when incorporating one in your Will.

Testamentary Discretionary Trusts

A Testamentary Discretionary Trust (“TDT”) can be used to provide for beneficiaries with special needs, including beneficiaries at risk of bankruptcy and those requiring asset protection generally.

TDTs can also be very tax-effective for beneficiaries with dependent children. However, they lack many of the specific advantages of Protective Trusts and SDTs referred to above. 

Direct gifts

A final option may be to give an amount directly to a beneficiary’s administrator or other representative. This may be appropriate where the amount of the gift is modest.

As experts in this area Russell Kennedy regularly distributes information and hosts seminars on this topic. To subscribe to our mailing list please click on 'Join our industry mailing lists' at the bottom of this page.