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Planning the distribution of your estate assets is rarely a straightforward task, but if you’re the parent of a child with a disability there is the added concern of how best to provide for your child once you’re gone.
The government’s Disability Support Pension (DSP) may provide sufficient income support to cover the basics, but the question remains. How do you bequeath your assets to ensure your child has what they need to enjoy a full life when you are no longer around to help out?
Unfortunately, there is no simple solution but experts in the area all agree it’s better for parents to start preparing an estate plan sooner rather than later, so their child – adult or a minor – has a secure future mapped out.
What is an estate plan?
An estate plan documents your wishes when it comes to the distribution of your assets and covers issues such as tax-efficiency and future control of key assets. Key estate planning documents include your Will, Power of Attorney or Enduring Power of Attorney, and an advance care directive.
In the case of a family that includes a child with disability, an estate plan can be a way to safeguard your child’s future by ensuring they receive quality support and have the necessary financial resources.
How do you plan for your child’s future?
A key step in developing an estate plan for your child with disability is establishing a clear vision of what you are aiming to achieve and what your child wants in terms of future support.
Your goals may be letting your child live in the family home for the remainder of their life, ensuring they have sufficient money to go on holidays, dividing your assets in an equitable manner with other family members, or ensuring a guardianship arrangement is in place.
This initial planning process should include other family members (such as siblings) to ensure everyone has input and the opportunity to express their wishes and expectations.
Each family member needs to know their responsibilities when you pass away, such as managing the trust if one is established, or checking on the services provided to the child with disability. Open discussion at this stage can help avoid future conflicts, particularly around the distribution of assets.
The child with disability should also be given the opportunity to provide input on their vision for the future, although this may depend on their level of cognitive understanding.
To help with this process, the Department of Social Services has a detailed booklet titled Planning for the Future: People with Disability available on its website. It outlines a suggested planning process and example scenarios, and provides templates covering key issues.
Capacity to manage money
When preparing your estate plan, it’s important to consider your child’s capacity to manage any money, property or other assets left to them.
While a child with physical disability may be perfectly capable of independently managing their own finances, some children with intellectual disability may not.
As a parent, you are best placed to understand their capacity in this area and you may decide full flexibility in accessing the inheritance is appropriate. Alternatively, you may believe your child will need help managing their finances and decide to place restrictions on their access.
It’s also important to consider whether your child is likely to be vulnerable to exploitation when it comes to management of the bequeathed assets.
How to provide for your child in your estate plan
There are a variety of options to consider when financially providing for a child with disability after your death.
It’s likely no single solution will be right and you may need to combine two or more strategies to achieve your desired outcome.
1. Will assets
Some parents decide to make direct gifts or bequests to their child with disability if they have the capacity to independently manage their own personal and financial affairs.
If this is appropriate for your child, it’s important to consider the tax implications of receiving their inheritance and the potential impact on any entitlement to income support.
A direct bequest or gift also needs to be balanced against the potential for future changes in legislation or personal circumstances. For example, if the beneficiary loses mental capacity after the gift is made, it may be necessary to appoint a financial manager to take over management of their finances.
2. Non-Will assets
Assets such as your life insurance or super death benefit cannot be dealt with through your Will. These assets need to be bequeathed via a policy or death benefit nomination in favour of the beneficiary and must be in line with the rules of the policy or super fund.
For many people, super is their biggest asset outside the family home, so parents looking to provide for a child with disability often opt to make their super death benefit nomination in their favour.
Leaving a super death benefit to a child with disability can be tax effective and they are generally able to receive the money as an income stream rather than a lump sum.
If you choose this strategy, it’s important to understand the rules around super death benefits. Unless you make a non-lapsing binding death benefit nomination, there is no certainty your child will receive the death benefit as a lapsed nomination returns the decision-making power to the trustee of the super fund.
3. Testamentary trusts
Another option when providing for a child with disability is to set up a testamentary trust, which allows a portion of your estate to be held in trust for your child during their life, or until they reach a specified age.
Testamentary trusts are flexible and can be useful for beneficiaries without severe disability. They can also be used to provide money for expenses not covered by a Special Disability Trust (see next section) or DSP payments.
Testamentary trusts are set up when you make a Will. A trustee is appointed to distribute the capital and income from the trust assets in line with set guidelines.
As a trust beneficiary, your child can use capital and income distributed by the trustee to pay for accommodation, education, personal expenses such as holidays, or support fees not covered by other source of income support.
Any excess income generated by the trust assets can be paid out or retained within the testamentary trust, although it may be subject to tax.
Unlike Special Disability Trusts, assets held within a testamentary trust may be counted towards a beneficiary’s eligibility for income support payments depending on their personal situation.
4. Special disability trust
Special Disability Trusts (SDT) are a specific type of trust designed to help parents provide for the current and future care and accommodation needs of a child with disability. You can set up an SPT while you are living or as part of your Will.
A Special Disability Trust must do all of the following:
- Have only one principal beneficiary and who must meet the eligibility criteria
- Provide for the accommodation and care needs of the principal beneficiary
- Have a trust deed containing clauses set out in the model trust deed
- Have an independent trustee, or alternatively more than one trustee
- Comply with the investment restrictions
- Provide annual financial statements
- Conduct independent audits when required.
Services Australia defines disability in three ways depending on the age of the principal beneficiary and their personal circumstances (such as level of impairment, where they are living and amount of time working in the open labour market).
For more on the SDT definitions, see the Services Australia website.
Unlike testamentary trusts, capital and distributions from an SDT is concessionally treated for social security purposes. SDT beneficiaries may be eligible for both a gifting concession and an assets test assessment exemption:
- A gifting concession of up to $500,000 combined is available for eligible family members of the principal beneficiary
- An assets test assessment exemption of up to $781,250 (indexed 1 July each year) is available to the principal beneficiary.
Specific criteria apply to immediate family members before the beneficiary is eligible for the gifting concession.
Trustees of an SDT are able to:
- Pay for the beneficiary’s dental and medical expenses, including membership costs for private health funds
- Pay maintenance expenses for trust-property assets
- Spend up to $14,000 (from 1 July 2023) on discretionary items not related to the care and accommodation needs of the beneficiary (such as clothing, entertainment and household goods). This expenditure must comply with the SDT rules.
SDTs are more restrictive than testamentary trusts as their main purpose is to provide for the beneficiary’s care and accommodation needs. Once money is placed into an SDT, it cannot be withdrawn or used for anything other than the purpose of the trust.
Given these restrictions, many parents choose to combine an SDT with other sources of financial support in an estate plan to provide flexibility.
You should always seek professional advice before drafting a Will enabling the creation of either an SDT or testamentary trust.
Factors to consider when setting up a trust
When you consider establishing a trust as part of your Will, it’s important to think about how much discretion to give the trustees in deciding whether and when to spend money on the beneficiary.
If trustees are given too little discretion, they may be unable to respond to any changes in your child’s circumstances in the future.
Trustees need to be chosen carefully to avoid any potential conflicts of interest with the best interests of your child. If there is no one suitable, your state’s Public Trustee or a private trustee company may be an option.