How to protect a beneficiary with special needs

Do you have a family member that can’t be trusted to responsibly deal with money?

Maybe they are too young or too old to maturely handle a substantial inheritance. Perhaps they have mental or psychological illnesses.

Perhaps they are addicted to illicit drugs, gambling or alcohol. Or maybe they’re just a fool with money, and are too impulsive to ever save or stick to a budget.

Then there are the loved ones who are involved with gold-diggers and predators, and you just know that as soon as your loved one gets their inheritance, they will be talked-out of it by the gold-digger who will then be last seen heading east with the proceeds.

If you are concerned that a beneficiary of your estate may find it difficult to manage an inheritance, you may consider using a protective trust to provide them with more security.

Assets inherited directly by your beneficiaries as a lump sum become part of the personal assets under their control. That makes them vulnerable to their creditors and predators.

The sensible use of these assets is dependent on the beneficiary’s ability to manage their own financial affairs. Some beneficiaries, however, may not be able to handle a direct inheritance for a variety of reasons, such as incapacity or addiction.

Leaving an inheritance directly to a beneficiary with any of these issues may lead to the loss or misuse of their inheritance.

What is a protective trust?

A trust is simply an ownership structure where the trust assets are held by a person or organisation (the trustee) for the benefit of other individuals or organisations (the beneficiaries).

A protective trust is a structure that provides protection for the beneficiary because a separate trustee holds the trust assets for the benefit of the beneficiary, and the beneficiary’s specific needs are considered as part of the administration of the trust.

A protective trust can be established while you are alive (intervivos) or built into your Will to take effect after you pass away (testamentary).

Most protective trusts are established in a Will and are therefore testamentary trusts. How does a protective trust operate?

In a typical protective trust:

1. A proportion of the estate is held in trust during the life of the beneficiary with special needs, or until they reach a specified age.
2. The trustee has the power to use the income and capital of the trust for the ongoing benefit of the beneficiary for a variety of approved purposes specified in the Will.
3. Each financial year, sufficient income and capital is distributed to the beneficiary to meet the cost of the approved purposes. Any remaining income is either accumulated within the trust or distributed to the protected beneficiary or other beneficiaries as directed by the Will.
4. Upon the death of the beneficiary with special needs, the capital remaining in the protective trust is transferred to other nominated beneficiaries.
5. If so desired by the Will maker, the beneficiary may become entitled to the capital of the trust on reaching a specified age or meeting another condition specified in the Will. At this time control of the trust can be transferred to the beneficiary, if appropriate, depending on the circumstances and condition of that beneficiary.
6. A protective trust will be a mandatory trust imposed upon the beneficiary due to their vulnerable state.

4 main protective trusts

1. Special Disability Trust. This is for people whom the Australian Government recognises as suffering a major disability entitling them to receive a Disability Pension. A special disability trust has substantial tax and other benefits, and permits the beneficiary to retain their pension as well as receive income and assets through the trust.
2. Minor Child Testamentary Trust. This type of trust occurs frequently inside Wills, and protects the inheritance of a person under the age of 18 until they are old enough to handle their own affairs.
3. Special Needs Protective Trust. This is often (but not always) inside a Will, and is designed to protect spendthrifts and fools from being parted with their inheritance by unscrupulous predators.
4. Life Interest. This is an ancient but still popular way of providing for a loved one (often an elderly spouse) during their lifetime, but in a way that does not allow them to own the asset (often the family home). Basically it gives the use of the asset but not the ownership.

Want to find out more?

All these and many more asset protection options are available for discussion with the oldest law firm in South Australia.

Genders and Partners will work with your Financial Advisor or Accountant to structure your estate planning as appropriate to your circumstances, including advice as to the use of testamentary trusts.

Disclaimer

The information contained in this document is intended as general information only and has been prepared without taking into account the needs, objectives or financial information of any particular person.

Prior to making any decision, you should assess whether the information is appropriate to your particular needs, objectives and financial circumstances.

While Genders and Partners has taken reasonable care in the preparation of this information, subsequent changes in circumstances (including legislative change) may occur at any time and may impact on the accuracy of this information.

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