Estate planning for children with special needs

Dec 26, 2021
As a starting point, we recommend sitting down and making an individual care plan for your child. Source: Getty

Raising children is challenging at the best of times, but for parents of children with special needs it can bring additional concerns, such as, who will take care of my child after I am gone and how will they cope financially?

In our experience, estate plans that involve children with disabilities can be further complicated by the fact many parents are time poor and already overwhelmed by paperwork.

A common question we receive is: what assets should I leave to a family member with high support needs and in what form? The good news is, there are many potential options available.

Creating a care plan

As a starting point, we recommend sitting down and making an individual care plan for your child, which can serve as a guide for carers, guardians, executors and trustees when you are no longer around.

Some of the things you may wish to document include:

  • The wishes of the person living with disability
  • What accommodation will satisfy their needs and desires
  • What activities they enjoy and want to continue
  • Which family and social connections it is important for them to maintain, and
  • How capable your son or daughter is of managing their own affairs.

Once you have a care plan in place, you can then look into the type of legal structure that will best match it.

Special Disability Trusts (for those with a severe disability)

One way to care for people with special needs through your estate plan is by setting up a Special Disability Trust (SDT). This type of structure is designed to assist family members to provide for the current and future care and accommodation needs of a family member with severe disability and also meet some of their discretionary spending needs for items such as food, clothing, therapy and recreation.

Unlike giving assets directly or through a testamentary trust, a benefit of this type of structure is that it attracts social security asset test concessions for the beneficiary and eligible contributors, which in 2021 is set at $700,250 (indexed annually). SDTs are also eligible for concessional gifting, capped at $500,000.

However, there are downsides to be aware of. Firstly, SDTs are restrictive and their main purpose is to provide care and accommodation. The beneficiary must have a severe disability and their caring needs must be rated as ‘intense’ under the Disability Care Load Assessment. When setting up this type of trust, proof must also be provided that the beneficiary will need care for at least six months or more and that the level of care required will be the same or increased in the future.

Another limitation of this type of trust is that discretionary spending is capped at $12,500 per year, which may be supplemented by the Disability Support Pension but might still be insufficient to meet your child’s needs. As such, if an SDT is viewed as an appropriate strategy, it may be worth combining it with another method of support to allow some flexibility.

Testamentary Trusts (for those who do not have a severe disability)

Another option is to set up a testamentary trust, which allows a portion of your estate to be held in trust for your beneficiary during their life or until they reach a specified age. Testamentary trusts do not have the same constraints as an SDT and can be useful for beneficiaries who do not have a severe disability or provide a fund for other expenses that cannot be supported by an SDT.

A testamentary trust is set up in the will and enables the trustee to distribute income and capital in a sustainable manner. The trustee distributes capital and income, which can be used to acquire accommodation, provide maintenance, support, education and pay for other expenses such as holidays. Excess income can also be paid out or retained in the trust.

However, unlike SDTs, assets in a testamentary trust will count towards the income and asset test for determining eligibility of social security entitlements.

Direct gifts (for those who can manage their own finances)

Of course, some people with additional needs are able to independently manage their own personal and financial affairs. In this case, a direct gift may be a suitable strategy.

Before making a direct gift, you will need to consider the tax implications and the impact the gift will have on your child’s social security entitlements.

It’s also important to understand that legislation and personal circumstances can change. Any direct gifts may be managed by a financial attorney or manager if the beneficiary loses mental capacity after the gift is made. Therefore, it is important to understand the level of support they will require before settling on a course of action.

No provision

We often advise against parents leaving their child no inheritance in order to maximise their social security benefits, as this can leave them without sufficient support in the future and could also lead to the will being contested.

Superannuation benefits

For many Australians, superannuation is their biggest asset outside the family home, and many parents opt to leave their superannuation death benefits to a child with special needs. Children with disabilities can receive superannuation death benefits in a tax-effective manner and can also receive an income stream from the super fund.

It is important to note, however, that providing for your child through your super does not offer the same level of control as setting up a trust.

Combining strategies

As outlined, there are a number of options available, and it is possible that no one strategy will be exactly right for your son or daughter. Combining two or more strategies may be appropriate but to get it right and provide flexibility for future changes in your child’s needs and capacity, it is important to do your homework and seek the right legal advice.

To read more articles by Marie Brownell, click here. To read more on estate planning generally, click here.

IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.

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