Under the Microscope - Special Disability Trusts (SDTs)

17 August 2009

Special Disability Trusts (SDTs) were introduced in 2006 by the previous Federal Government with much fanfare about how they would benefit families with disabled children. However, from data provided to the current Senate Inquiry into SDTs, few families have opted to set up a SDT with only 22 being recorded by the end of 2007.

So what is a SDT and why is it supposedly such a great thing for families with disabled children?

Put simply, a SDT is a trust set up by a person while they are alive or in their Will where the main purposes of the trust are to house and care for a severely disabled person. Importantly, unlike other trusts which are set up for similar purposes, the funding for a SDT (which is currently limited to around $500,000.00 plus a residence) and the trust income do not affect the eligibility of the disabled person to receive a disability pension and other important government healthcare benefits.

Another advantage of establishing a SDT is that where a parent or grandparent of a severely disabled person is receiving, or is planning to qualify for, an aged or other government pension, they can gift assets to the SDT without affecting their pension or their potential eligibility to receive one.

However, anyone considering using a SDT must also weigh up disadvantages including prohibitions about using trust funds for the disabled beneficiary's other living needs (i.e. apart from housing and care), to support any children or other dependants of that person and paying relatives for care and other services.

While few SDTs have so far been established, no statistics are available about how many SDTs have been included in the Wills of families with disabled children. From that perspective, it is still too early to judge the potential usefulness of SDTs, especially where in a Will a SDT is combined with an All Needs Protective Trust.

Consider the following example:
A couple owns their home debt free (value $500,000), a rental property with a small debt (net value $250,000) and superannuation (value $500,000). They have three children, all adults with one being severely disabled.
A financial advisor has told them that over the long term a $500,000 fund is likely to generate only about $25,000 per annum of income after tax.
The couple have also been told that amount will not be anywhere near enough to cover the annual cost of housing, caring and providing a reasonable quality of life for their disabled child.

The couple therefore make Wills that on the death of the survivor leave their home and, through the use of binding death benefit nominations, their superannuation to a SDT. Their Wills also provide for the rental property to be sold and the proceeds (or so much of the proceeds that will preserve the disabled child's healthcare benefits) to be used to fund an All Needs Protective Trust which can provide for their child's other needs.

On the death of the disabled child, any remaining funds from both trusts will be left to the couple's other surviving adult children. The couple hope that once they have explained their plans to their other children that they will understand and not seek to upset those plans by challenging the surviving parent's Will.

Brien Leibinger is the partner in charge of the Wills and Estate Planning Division.

Contact Brien if you would like to discuss your particular situation further.

Brien Leibinger│Partner
E bleibinger@prestonlaw.com.au
P 4052 0705

or email: info@prestonlaw.com.au