Protecting loved ones within estate planning

Amongst the COVID-19 headlines of 2020, you may recall the tragic story of South Australian woman Ann Marie Smith, which left many feeling horrified and helpless.

Ms Smith was found in deplorable conditions, having been abandoned for days to slowly perish, sitting upright in her squalid chair. Ms Smith suffered multi-organ failure as a result of her severe neglect and malnutrition, passing alone and undignified.

An investigative task force co-chaired by Dr. David Caudrey, South Australian Disability Advocate, commented on the tragedy:

“It’s every parent’s nightmare to think that when you’re no longer around or you can no longer look after your son or daughter with a disability that somehow or another they will not be looked after properly…”

The taskforce specially examined “gaps in oversight and safeguarding for people living with disability in South Australia”.1

The circumstances surrounding Ms Smith’s death poses a challenging question for estate planning lawyers: what options are available to protect vulnerable dependents living with a disability?

Whilst there is no substitute for the care and support of family, there are legal mechanisms that can assist securing a beneficiary’s financial future within the testator’s Will.

Although this is often a multifaceted issue, you can ensure your clients are well advised on protective estate plans for their spouses, children or other dependents, as required.

SPECIAL DISABILITY TRUST IN WILLS

The Special Disability Trust (SDT) can be established to assist families with planning for and securing the financial future of their loved ones who suffer with a disability.

The SDT is generally established in the name of the beneficiary who has the disability (the principal beneficiary) within the Will of the parent or guardian.

This structure allows a testator to transfer assets to the protective trust (stamp duty free) upon their death and the income and capital of which, must be applied solely for the accommodation and

care needs of the principal beneficiary. As with any other trust, the SDT will appoint a trustee, who bears the responsibility of applying the trust monies towards the welfare of principal beneficiary.

There must be at least two trustees at all times, except where a professional trustee or a corporate trustee is appointed. The category of expenses that the funds can be applied to is strict – the

expense must be associated with the beneficiary’s disability.

Some examples of how the trustee can apply SDT funds are listed below:

• paying for medical and dental expenses;
• personal care expenses;
• the purchase of a primary place of residence;

• renovations that modify the beneficiary’s existing residence for ease of mobility;

• residential care services if the beneficiary is in care;

• modification to or the purchase of a motor vehicle;

• the fees and costs associated with private health funds and like insurances.

In addition to these expenses, an SDT can pay for discretionary spending. The cap for this category of spending is $12,500 as of 1 July 2020 for the 2020-2021 financial year, adjusted annually.

Discretionary spending is classed as the following, that is not connected to the principal beneficiary’s disability:

• Food, toiletries and clothing;
• Motor vehicle expenses;
• Capital improvements to the beneficiary’s home;

• Leisure activities and outings;
• Therapy;
• Electronics and entertainment;
• Other insurances not associated with the disability.

INCOME AND ASSETS OF THE SDT:

Income assessment

One of the most appealing benefits of utilising an SDT to transfer assets to a disabled beneficiary is that the trust assets do not affect the principal beneficiary’s entitlement to disability income support. Income that is generated from the SDT assets (e.g. rent, dividends or interest) will not be included in the beneficiary’s income test for the purposes of an application for disability benefits.

Asset assessment

The SDT can also hold assessable assets of up to $694,000 for the 2020-2021 financial year, adjusted annually, which are exempt for from the application of the social security assets test. Holding assets in an SDT will therefore not affect income support entitlements, up to this concessional asset value limit, indexed annually. It should be noted that the principal beneficiary’s principal place  if resident is not an assessable asset and is exempt from the concessional asset value limit.

Eligibility Criteria

It is important to seek experienced advice prior to establishing an SDT, as the eligibility criteria for the principal beneficiary is narrow2 and qualifying for SDT status and treatment is regulated by  strict statutory framework. It is necessary that, before a SDT is established, the prospective trust beneficiary must be assessed as severely disabled under to qualify for the trust benefits.3

Some of the eligibility criteria used for a principal beneficiary are:

the disability would qualify a sole carer for carer payments or carer allowance;4

The disability inhibits the principal beneficiary from 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;5

The disability or impairment qualifies the principal beneficiary for a disability support pension.6

There are also restrictions on the types of investments that can be established within the trust.7 For example, the trustee is prohibited from purchasing or leasing property from anybody who is an immediate family member of the principal beneficiary even if the property is to be used for the principal beneficiary’s accommodation.

Independent audits must also be conducted and complied with8, in addition to the annual provision of financial statements.9

Upon the death of the principal beneficiary

Another attractive benefit for the testator establishing an SDT by will, is that when the principal beneficiary dies, the testator can stipulate who the residuary beneficiaries of the trust are. The trust does not need to vest, it can continue for the residuary beneficiaries, however it will lose it’s SDT status upon the death of the principal beneficiary. The structure is therefore also advantageous for a testator who wishes to circumvent assets being distributed to the estate of the principal beneficiary, as they may not have testamentary capacity to then bequeath those assets. Special Disability Trusts are a useful estate planning tool when tailored to the right client’s intentions and circumstances. The sophisticated structure ensures that future care requirements will be seen to without financial burden on other relatives. B

Endnotes

1 Premier of South Australia, ‘New disability taskforce to be established’ (Media Release, 18 May 2020).

2 Social Security Act 1991 (Cth), s 1209M.

3 Ibid.

4 Ibid, s 1209M(2)(b)(i).

5 Ibid, 2(c)(i).

6 Ibid, 2(a)(i).

7 Ibid, s 1209R.

8 Ibid, s 1209T.

9 Ibid, s1209S

NOUR HARB, ASSOCIATE, TINDALL GASK BENTLEY

Originally published in The Bulletin Volume 43 – Issue 6- July 2021