Estate Planning for Parents of Disabled Children

For parents of children with disabilities, there is often a concern about how to transfer wealth to their child in a way which ensures that the child is protected from financial abuse as well as being cared for financially.  In some cases, there is also a concern about continuing entitlements to social security benefits.

Depending on the type and level of the disability, it might be important to ensure that the child does not have the personal control of financial resources.  This can be achieved by creating trusts in wills for the benefit of the child.

The typical types of trusts that are often considered in this context include:

  • Capital reserved trusts. With this type of trust the child is the principal beneficiary and is able to receive the income from the trust and use trust assets, such as property as a home, during their lifetime. The beneficiary will not have any beneficial ownership of the assets in the trust. On the death of the principal beneficiary, the will directs how the capital assets of the trust will be distributed.
  • Protective Trusts/Special Needs Trusts. This is a flexible trust which allows the trustee to apply income as well as capital for the maintenance, benefit, advancement in life and general wellbeing of the child during their lifetime.  The child is the principal beneficiary of the trust. The trust can also provide accommodation and meet the expenses of the maintenance, upkeep and incidental costs of the accommodation.  On the death of the principal beneficiary, the will directs how the remaining assets of the trust will be distributed.
  • Special Disability Trusts. These trusts are used to provide for “severely disabled beneficiaries” as defined by the Social Security Act 1991 (Cth).  The benefit of these trusts is that the assets, to the set cap, are exempt from the means testing applied to determine eligibility for social security benefits.  The current cap is $657,250.00.  The cap is indexed for inflation at the commencement of each financial year.  This means that the principal beneficiary will not have the value of these assets attributed to them for the purposes of determining their eligibility for social security benefits.  The income and assets of the trust can only be used for the purposes of meeting the accommodation and care needs of the principal beneficiary.  Each financial year, the trustee may spend up to a set cap on other expenses not related to the care and accommodation needs of the beneficiary.  The current cap is $11,750.00 and this cap is indexed for inflation at the commencement of each financial year.  There are also income and capital gains tax exemptions.

With the exception of special disability trusts, the assets held in other trusts may be taken into account for the purposes of social security means testing.  Depending on the circumstances, it might be the case that a combination of the abovementioned trusts are created for the benefit of the child.

Another important consideration when establishing trusts for a disabled beneficiary is ensuring that the right person is acting as the trustee.  The trustee is responsible for the administration of the trust and determining how trust funds are used and distributed. There is sometimes a risk associated with the appointment of a family member in these roles as they may make decisions which are not in the best interests of the beneficiary and in some cases, it might be necessary to appoint an independent executor and trustee.

Estate plans should be developed to meet the individual circumstances of the parents, disabled child and other family members.  Having the appropriate, tailored estate plan can provide peace of mind for a parent in knowing that their disabled child is financially provided for and protected.

Marie Brownell

Head of Private Client Services

Accredited Specialist (Wills and Estates)

[email protected]