Estate Planning: How to protect your vulnerable loved ones

Planning for a loved one who may have a disability or have some other form of vulnerability such as a drug addiction, financial susceptibility or pressure from undue influence can present many challenges. Often, there is a need to find a balance between ensuring that the beneficiary is looked after for their lifetime and ensuring that they do not have control over the funds.

Where there is a disability involved, the beneficiary may be in receipt of a government disability pension and in this case, one of the key objectives in an estate plan may be to preserve pension eligibility.   

Planning for Vulnerable Beneficiaries

When planning for vulnerable beneficiaries, there are a number of matters that need to be considered when determining the appropriate provision and structure for the beneficiary. These include:

  • Does the beneficiary have capacity or do they have other people making decisions on their behalf, eg, an attorney appointed under an enduring power of attorney or an administrator or guardian appointed by VCAT;
  • Is the beneficiary in receipt of a disability support pension and is preserving this pension and the associated care and health services, a priority?
  • What are the medical, accommodation and other needs and requirements of the beneficiary?
  • Are there any known undue influences or illnesses to guard against?
  • What is the size of the estate and non-estate interests of the person who wishes to make provision for the vulnerable beneficiary, and are there any other beneficiaries likely to benefit?
  • Does the beneficiary have any children or other dependants that will need to be considered?

Trusts for Vulnerable Beneficiaries

For many vulnerable beneficiaries, the straightforward option of outright ownership and control can have significant pitfalls.  It can expose assets to the consequences of unsatisfactory decision making or cause a beneficiary to lose their disability pension and healthcare and services associated with receiving that pension.  Paying a superannuation pension to the beneficiary is generally also not an option these days as these benefits can be readily accessed by the person and there can be broader tax and superannuation consequences.

Special Disability Trusts (SDTs) and Protective Trusts are two types of trusts that may be considered as a means of benefitting a vulnerable beneficiary. Advice should be sought on the appropriateness of either or both of these types of trusts having regard to the particular circumstances and needs of the beneficiary.

Special Disability Trusts

SDTs are trusts that primarily provide for the care and accommodation of a person with a severe disability. They potentially allow for income and assets means tested pension concessions for a principal beneficiary with a severe disability.   

The key characteristics and requirements of a SDT are:

  1. They can be established by family members during their lifetime for the benefit of a vulnerable beneficiary, or on the death of the family member via their Will;
  2. The principal beneficiary must have a “severe disability” which is defined according to the Social Security Act;
  3. An assets test assessment exemption of up to $681,750 (indexed 1 July each year) is available to the principal beneficiary.  This means that the amount is not counted towards the assets test for determining eligibility for the disability pension;
  4. If eligible family members of the principal beneficiary gift an amount to the trust, there is a combined gifting concession of up to $500,000 if such family member is also receiving or might be eligible for a government pension (eg, old-age pension);
  5. Dutiable property (such as real estate) gifted into a SDT may be eligible for stamp duty concessions or exemptions (the laws in each State will differ).  For example, in Victoria, dutiable assets of up to $500,000 gifted to a SDT will be exempt from stamp duty.  If the gifted asset is valued at over $500,000 duty will only be payable on the value exceeding that amount.
  6. Where a disposal of an asset would ordinarily raise a capital gains tax (CGT) liability, then if the asset is gifted to a SDT, there is a full exemption from CGT.  The cost base of the CGT asset is also refreshed to its market value at the time it is gifted to the SDT.
  7. Funds placed in the trust are intended to meet the care and accommodation expenses of the principal beneficiary but up to a certain amount each year can be spent on other discretionary expenses (currently $12,250);
  8. The trustee must either be a professional trustee or two or more individuals;
  9. The terms of the trust deed must reflect the model trust deed endorsed by Centrelink and;
  10. There are strict reporting requirements including providing annual financial statements and conducting independent audits.

Protective Trust

A Protective Trust is another type of trust that can be established to financially protect a vulnerable beneficiary who has not been assessed by Centrelink as having a severe disability.  A Protective Trust is free of the constraints of a SDT which means that it can used for broader purposes such as providing financial support for recreation, entertainment, holiday travel, personal furniture and fittings and personal belongings.

The capital in a Protective Trust and any generated income is fully assessed for the purposes of the Centrelink means testing. Unlike a SDT, there is no stamp duty concession or exemption for gifting dutiable property into a Protective Trust nor an exemption from CGT.

The Protective Trust may be more suited where pension eligibility is not a priority and decisions regarding the distribution of income and capital distribution are made by someone other than the principal beneficiary. For example, a protective trust is established with an independent controller to provide for a beneficiary who has a drug addiction.

Establishing a SDT or Protective Trust

A SDT and Protective Trust can be established by deed or via Will.

A SDT or Protective Trust that is provided for in a Will does not come into effect until the Will-maker dies.  If a Will contains provisions for a SDT and Protective Trust, an expertly drafted Will should give the executors discretionary powers to consider the beneficiary’s circumstances, needs and any other relevant factors to determine whether they hold the beneficiary’s share of the estate in a SDT, Protective Trust or a combination of both trusts. For example, the executors may determine to hold such of the inheritance that will not impact on the beneficiary’s pension eligibility in a Protective Trust where the funds can be used for broader purposes. 

How can we help

For over 40 years Moores has been providing legal assistance for people who wish to provide for a loved one with a disability or other vulnerability. We also provide advice to clients and their financial advisors with respect to any taxation, state duty or Centrelink implications upon establishing a SDT or Protective Trust.

If you or someone you know would like to talk with us about estate planning, please do not hesitate to contact us.