SMH Lesley Parker
March 19, 2008
A new type of trust aimed at helping the parents of disabled children provide for their care and accommodation hasn’t proved as useful as hoped and families are exploring other avenues, including early access to the superannuation system
The special disability trust structure introduced by the Federal Government in September 2006 quarantines money set aside for care and accommodation from rules affecting age and disability support pension entitlements
Assets held in such trusts are exempt from the social security assets test, up to a limit of $516,500 (adjusted annually for inflation) on top of the usual assets test thresholds. In addition, family members eligible to contribute to such a trust are exempt from gifting rules that affect pension entitlements
On the flip side, it would be possible for the representative of a disabled child to challenge a will on the grounds that dividing the estate equally didn’t make adequate provision for their special needs.
Generally speaking, pensioners can’t give away more than $10,000 a year without affecting their entitlements. Immediate family who receive a pension can safely contribute up to $500,000 to a special disability trust (as long as other trust rules are met).
People working in this area, however, say take-up of the trusts has been cramped by the limitations on their use and the costs involved. Advocacy group Carers Australia says that of December 31, only 22 trusts had been established.
The Department of Families, Housing, Community Services and Indigenous Affairs confirmed this figure, adding that the total value of contributions at that date was $5.7 million (which is an average of $259,000 a trust).
Carers Australia chief executive Joan Hughes says the trusts “are just out of the reach of so many families”.
“The policy’s right but not the amount,” she says. The trusts just aren’t practical help for families relying on Centrelink payments to survive.
“[Financial] advisers were fairly excited about the potential of these trusts but they don’t seem to have had a good take-up rate because of the limitations,” says Robert Simon, senior technical adviser with financial advice firm Ipac.
Terry Matthews, a consultant with TressCox Lawyers says the trusts are limited to the “severely disabled”, as defined under the rules governing the trusts. Once established, there are also strict rules about the accommodation and care costs the trusts can meet, he says.
For example, they can’t pay a parent for providing care – only someone specifically employed as a carer. They can’t pay for food other than special food required because of the disability, they can’t meet medical needs not directly related to the disability and they can’t pay for the ordinary upkeep of the disabled person’s residence.
Matthews says that, as a result, families may have to set up more than one trust – using the special disability trust to meet costs such as paid care and a parallel family or “protective” trust for other needs.
Administration is the other issue. Special disability trusts are very expensive to run, Simon says. The trustee must report annually to Centrelink, the trust has to file a tax return and an independent audit can be required at any time.
Matthews says the cost and complexity of establishing a trust means it may not be a viable step for families with less than $500,000 to place in a trust – the sort of families who would be receiving the pensions the Government aims to protect. Families with substantial finances who could afford to set up a trust are unlikely to have concerns about protecting pension entitlements.
Queensland lawyer Katrina Brown, who has a special interest in this area, says even higher-income families may wish to protect disability pension rights for their children, because being a pensioner can be a condition of access to some programs for disabled people.
Brown regards special disability trusts as more of a succession planning tool for older parents, where they are established via a will to provide for a disabled child once the parents pass away.
Previously, parents were leaving money to other relatives to provide for a child – so their disability pension wasn’t affected – but this left the door open for relatives to mismanage the money, she says.
Brown says some of the initial excitement around the trusts was to do with getting away from the penalty tax rates that apply to investment income earned by minors (aged under 18). Tax law has long had a special provision for disabled children, however, who pay tax at normal adult rates rather than at rates as high as 66 per cent.
Ipac’s head of technical services, Colin Lewis, says another way to provide financially for disabled children is through the super system, which has become easier since rule changes last year.
A change to the definition of what constitutes total and permanent disability means they could gain early access to super benefits on the grounds of disability.
Previously, the definition of such disability meant a person had to have ceased work, which meant you had to have been gainfully employed in the first place – this, Lewis says, cut many out.
However, the definition now refers to being unlikely to ever work. This opens the door for many more disabled people to contribute to super and draw a lowly taxed allocated pension, as long as two doctors certify it’s unlikely they’ll ever work.
“[Suddenly] a lot of people were brought into the net who could never have used super,” Lewis says. This includes children – depending on the particular fund’s rules – because minors can now contribute to super.
Where there’s a will
Can parents treat their disabled child and other siblings differently in a will?
In one scenario the parents might leave more to the disabled child, because of special needs; in another, they might consider leaving less so the child’s social security entitlements aren’t affected.
Potentially, financially dependent children could challenge a will on the basis that it isn’t fair, TressCox Lawyers consultant Terry Matthews says. However, siblings would have a hard time convincing a court they had been hard done by if a disabled brother or sister was involved.