A special disability trust (SDT) is a valuable option to consider when planning for the long-term care and accommodation needs of a loved one with a severe disability.
There are major tax benefits to setting up such a trust – yet some people in this position are not aware that the option even exists.
What is a special disability trust?
A special disability trust is a vehicle in which funds can be set aside for the particular needs of a family member with a server disability.
Before these trusts were available, arranging funds to ensure the long-term care of those with special needs could have disastrous tax and welfare implications.
You face enough challenges with a disabled loved one without paying too much tax or losing access to the welfare benefits you rely on.
Special disability trust: the benefits
In the right situation, a special disability trust can be extremely beneficial.
The concessions available are designed to help ensure that the ongoing needs of individuals with severe disabilities continue being met, even when a family can no longer provide assistance.
Below, we detail the key tax benefits. Please also read this article for insight into the welfare benefits that an SDT can provide.
Some of the key tax concessions granted to SDTs include:
Children are taxed at adult rates
Generally, when a child under the age of 18 earns investment income, he or she is taxed at close to 50 percent. However, with the use of a special disability trust, income is taxed at regular adult rates.
This means that a child can earn over $20k without having to pay any tax.
EXAMPLE: You’re a parent fortunate enough to have some savings/investments and you’re looking to put aside $400,000 for the future care of your child. If you retained the investments in your name, earning 5 percent would result in income of $20,000 subject to tax. Depending on your tax rate, tax could easily be over $8,000. By setting up a special disability trust, these earnings could become tax-free by taking advantage of your child’s tax-free threshold. That means an extra $8,000 towards your child’s needs rather than the tax man!
No capital gains tax on investment contributions to an SDT
Generally, if you hold an investment that you gift to another family member, the tax office would consider it a realisation event and would tax you on the capital gains you had made on the investment to that point in time.
You can contribute up to $500,000 to a special disability trust and neither party will be taxed on the transaction.
EXAMPLE: Let’s assume you had originally invested $200,000 and have been fortunate enough for the investment value to rise to $400,000. Ordinarily, when the investments are sold, you would pay capital gains tax on the $200,000 profit. Depending on your income and after applying capital gains concessions, tax on the gain could easily be over $40,000. However, when dealing with an SDT, contributions are tax exempt. The $40,000 in tax would be saved and could be put towards the care of your loved one.
Principal Place of residence exemption
A person with a special disability can own their home within a special disability trust and all the tax concessions of a principle place of residence are retained.
This can be particularly useful if your loved one is not deemed to have the mental capacity to otherwise legally own a property.
EXAMPLE: You would like to leave your home to your child when you pass on but their disability means they are unable to own property in their own name. Before special disability trusts, there were few options. Fortunately, now you can use a trust as a vehicle to hold the property for your child, as well as retain principle place of residence tax concessions.
Ready to consider a special disability trust?
The tax concessions available with a special disability trust can place a disabled person and their family in a greatly improved financial situation.
These trusts provide asset protection and other benefits without impacting the entitlement to a disability support pension.
SDTs are not appropriate in all situations. There are stricter regulatory regimes to comply with than other trusts.
However, they can be extremely beneficial to families in the right situation.
Please contact us to take advantage of our free initial consultation and find out more about whether a special disability trust is appropriate for you.