Special Disability Trusts

Special Disability Trusts (SDTs) are a legal structure in Australia designed to help families provide for the long-term care of a loved one with a disability.

It is commonly used by parents who wish to provide assets for their child with a disability in the present and for the long term. It can be created either whilst the parents are still alive or when they pass away through their will.

They are typically set up in combination with:

• An Estate Planning Specialist to apply for the SDT eligibility with the Department of Human Services.

• An Accountant to create the trust structure and complete the yearly accounting statements.

• A Financial Planner to assist with the investment management and cashflow decisions (which often includes detailed long term modelling and projections).

The main benefits of a Special Disability Trust are:

• Asset Protection: The assets that are contributed into the trust are now owned and protected within the trust. A trustee can be appointed to manage the assets of the trust on behalf of the beneficiary (the person with the disability).

  
  

  For example, if the parent's of the person with a disability were to pass away, they could nominate an adult sibling of the disabled person to be the trustee of the trust and manage the investments and allocate the income for the benefit of the disabled person for medical care, accommodation, and other expenses. A Financial Planner can also be appointed to help the trustee invest and manage the assets.
  

• Tax Benefits: One of the main benefits of a SDT is that children beneficiaries are eligible to receive 'adult tax rates'. This means that the income that is allocated to them is taxed at normal marginal tax rates (MTR) rather than the more punitive child tax rates.

  
  

  By contrast, with MTRs, the first $18,200 of income is tax free, whereas for child tax rates, income above $1,307 p.a. is taxed at 47%. This means there could be significant tax savings available by using a SDT.

  
  

  Another significant tax benefit of an SDT is that assets transferred into the trust (such as real estate or shares) are generally exempt from Capital Gains Tax (CGT).

• Asset Test & Gifting Exemptions: If the parents/family members of the beneficiary are eligible for Age Pension or Disability Support Pension of their own, they receive a gifting concession of up to $500,000 combined which helps reduce their own pensions being penalised for gifting into the trust.

  
  

  The beneficiary can also receive an assets test assessment exemption of up to $813,250 (indexed 1 July each year) for assets held in the trust.

Whilst the concessions listed above are very generous, you need to have the financial means to make an SDT is viable as there are some yearly fees required (most notably the annual accounting costs required for the trust).

We can help analyse whether the benefits of setting up a SDT outweigh the potential costs, and or the benefits of other strategies (such as simply gifting an equivalent amount, without the trust structure).

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