Some of the things you might want to document are:
- The desires of the disabled person
- Which accommodation will meet your needs and wishes?
- What activities they enjoy and want to continue
- Which family and social ties are important to them, and
- How capable your son or daughter is of managing their own affairs.
Once you have a care plan in place, you can examine the type of legal structure that best suits it.
Special Disability Trusts (for severely disabled people)
One way to take care of people with special needs through your estate plan is to set up a Special Disability Trust (SDT). This type of structure is designed to help family members meet the current and future care and housing needs of a family member with severe disabilities, as well as some of their discretionary spending needs on things like food, clothing, therapy, and recreation.
One advantage of this type of structure, as opposed to direct or testamentary trust assets, is that it attracts social security asset auditing perks for the beneficiary and eligible contributors, indexed to $ 700,250 annually in 2021 ) be determined. SDTs are also eligible for discounted gifts that are capped at $ 500,000.
However, there are downsides to be aware of. First, SDTs are restrictive and their main purpose is to provide care and shelter. The beneficiary must have a severe disability and his or her need for care must be classified as “intensive” in the Disability Care Load Assessment. When setting up such a foundation, it must also be proven that the need for care is in need of care for at least six months or longer and that the need for care will be the same or increased in the future.
Another limitation to this type of trust is that discretionary spending is capped at $ 12,500 per year, which the disability pension can add to but still may not be enough to meet your child’s needs. Therefore, if an SDT is seen as a suitable strategy, it may make sense to combine it with another support method to allow some flexibility.
Testament foundations (for people without severe disabilities)
Another option is to set up a testamentary trust, which makes it possible to hold part of your estate in trust for your beneficiary during their lifetime or until they reach a certain age. Testament trusts are not subject to the same restrictions as an SDT and can be useful for beneficiaries who are not severely disabled or who set up a fund for other expenses that cannot be met by an SDT.
A testamentary trust is set up in the will and enables the trustee to distribute income and capital on a sustainable basis. The trustee distributes capital and income that can be used to purchase housing, maintenance, assistance, education, and other expenses such as vacation. Surpluses can also be paid out or retained in the trust.
In contrast to SDTs, however, assets in a testamentary trust are taken into account in the income and asset test to determine the eligibility of social security claims.
Direct gifts (for those who can manage their own finances)
Of course, some people with additional needs are able to manage their personal and financial affairs independently. In this case, a direct gift can be an appropriate strategy.
Before making a direct gift, you need to consider the tax implications and the impact of the gift on your child’s social security rights.
It’s also important to understand that laws and personal circumstances can change. All direct gifts can be administered by a finance attorney or manager in the event that the beneficiary loses mental capacity after the gift is given. Therefore, it is important to understand how much support you will need before committing to a course of action.
We often advise parents not to leave an inheritance to their child in order to maximize social benefits, as doing so can lead to future failure and will also challenge the will.
For many Australians, retirement benefits are their greatest asset outside of the family home, and many parents choose to leave their death benefit for retirement to a child with special needs. Children with disabilities can receive death benefits from the old-age pension in a tax-effective manner and can also receive a stream of income from the super fund.
It is important to note, however, that having your child cared for by your manager does not provide the same level of control as setting up a foundation.
As mentioned, there are a number of options and it is possible that no strategy will be just right for your son or daughter. Combining two or more strategies may be appropriate, but in order to get it right and offer flexibility for future changes in your child’s needs and abilities, it is important to do your homework and get the right legal advice.
To read more articles by Marie Brownell, click here. To learn more about estate planning in general, click here.
IMPORTANT LEGAL NOTICE This article is general in nature and is for informational purposes only as it does not take into account your financial or legal situation, goals or needs. That means it is not about financial products or legal advice and should not be relied on. Before making any financial or legal decision, find out if the information is appropriate for your situation and obtain independent, licensed financial services or legal advice.