Key Differences between Protective Trusts and Special Disability Trusts

Protective Trusts

Protective Trusts are designed to safeguard assets for vulnerable individuals while providing flexibility in management and distribution. Key aspects include:

• Inter vivos or Testamentary: A protective trust can be established during a person’s lifetime (the settlor’s lifetime) or upon their death through their will.

• Primary Purpose: To ensure ongoing care, maintenance and quality of life for the Primary Beneficiary, being a person with special needs.

• Trustee Discretion: Trustees have broad discretion to manage assets and make distributions. With the correct trustees in place, such discretion can be seen as a virtue. 

• Secondary Beneficiaries: Provision exists for the inclusion of other beneficiaries (e.g., family members) after the Primary Beneficiary's lifetime. This will allow for assets to be directed back to other children should they outlive the Primary Beneficiary.

• Asset Protection: Safeguards exist under such a structure to protect the Primary Beneficiary from misuse by dishonest or opportunistic acquaintances.

Benefits of an Inter Vivos Protective Trust- Continuity of Care:

• By establishing the trust during their own lifetime, the settlor can ensure that the Primary Beneficiary’s needs are met without interruption, and the structure will continue after the death of the settlor.

• The trust will provide a structured mechanism for ongoing care, maintenance, and quality of life for the Primary Beneficiary.

Benefits of an Inter Vivos Protective Trust- Avoidance of Probate:

• Assets placed in an inter vivos trust are not subject to probate upon the settlor’s death, which can save time and reduce legal costs.

• This also ensures privacy, as the trust’s terms and assets are not made public through the probate process.

  
  

Structure of Protective Trusts:

1. Trust Fund: This can include initial sums settled, transferred property, accumulated assets, and loan proceeds. For example, the settlor’s will can, if considered appropriate, transfer a residence to the (pre-existing) trust structure via will.

2. Beneficiaries:

   • The Primary Beneficiary: The Primary Beneficiary.

   • Potential Beneficiaries (Beyond the Primary Beneficiary): Family members, spouses etc.

   • Exclusions: Foreign beneficiaries or inclusions that invalidate the trust.

3. Trustee Powers: Wide discretion in administering the trust, with the option for certain actions to require the protector's consent if this is required.

4.      Protector Role: The protector oversees trustee actions and ensures accountability. The protector has the power to:

• Scrutinise trustee actions.

• Consent to trustee actions.

• Intervene where appropriate.

• Accommodation: Trustees may arrange suitable housing for the Primary Beneficiary or oversee the Primary Beneficiary’s continued occupation of his current home.

• Termination: The trust ends upon the Primary Beneficiary’s death or by law, with remaining assets distributed as specified. The assets can be directed back into the family.

Strengths:

• Flexibility in adapting to the beneficiary's needs. This flexibility allows the trustee to adapt to changing circumstances, such as the Primary Beneficiary’s evolving care or financial requirements.

• Oversight through the protector role (if required).

• Clear succession planning for trustees and protectors.

• Legal safeguards for the Primary Beneficiary.

Considerations:

• The settlor’s expectations may not always align with the Primary Beneficiary’s expectations.

• The protector's significant powers could lead to conflicts (so, if a protector is appointed, the choice needs to be a considered one).

• The trust's provisions are detailed and may require professional administration to ensure compliance with legal and tax obligations. Having said that, this point would be even more applicable to Special Disability Trusts.

Special Disability Trusts:

Special Disability Trusts are specialised trusts established for individuals with severe disabilities, offering financial support while maintaining eligibility for government benefits.

Key Features:

• Centrelink Benefits: Assets are exempt from means testing, preserving government support.

• Tax Concessions: Income is taxed at concessional rates.

• Eligibility Criteria: The Primary Beneficiary must meet the definition of "severe disability" under Australian law. This is an issue for consideration and might involve considerable Departmental input.

• Purpose-Specific: Focused on care, accommodation, and essential services.

• Audits etc: Special Disability Trusts must be audited annually and investment plans must be submitted annually.

Requirements:

1. The Primary Beneficiary:

   • Must be the sole beneficiary during their lifetime.

   • Must meet the “severe disability” criteria/definition.

2. Trust Deed: Must include compulsory clauses to comply with legislation.

3. Trustees:

   • Must be Australian residents.

   • Can include professional or corporate trustees. Where possible, we would suggest that family members with a commitment to the well-being of the Primary Beneficiary be appointed as trustees (whether inside or outside of a corporate structure).

4. Expenditure: Funds must primarily address care and accommodation needs, with limited discretionary spending.

5. Reporting: Annual financial statements and audits may be required.

Tax Benefits (as at July 2025):

• Assets Test: Exemption for assets up to $832,750 (2025/26).

• Income Test: Exemption for income derived by the trust.

• Gifting Rules: Family members can gift up to $500,000 without assessment.

• Taxation: Income taxed at the beneficiary's marginal rate, with CGT exemptions.

Comparison of Trust Types:

1. Protective Trusts:

   • Broader flexibility and it allows for secondary beneficiaries (with greater succession planning benefits).

   • Suitable for general asset protection and care.

   • Protective Trusts can be set up quite readily without the need for governmental oversight.

2. Special Disability Trusts:

   • These are usually tailored for people with severe disabilities and to provide specific legal and tax benefits.

   • Focused on maintaining government support.

   • These are more regularly scrutinised by the government with considerable compliance requirements.

   • Setting up a Special Disability Trust can be time-consuming, frustrating and expensive given the hours inevitably involved, particularly in arranging the necessary input from and direction of governmental departments.

Recommendations:

• Trust Selection: We urge clients to discuss such matters with their financial planners and/or tax advisors, both of whom will have detailed knowledge in regard to the specifics of the mechanics of either form of trust (including Centrelink issues) and who will also be able to consider such specifics in light of the settlor’s own personal structures and asset holdings.

• Inter vivos or testamentary: It is clear that establishing the necessary trust through a will (making it a testamentary trust) can provide considerable taxation benefits. However, establishing an inter vivos trust allows the settlor, during the settlor’s life-time, to establish the trust and to ensure it is working to the Primary Beneficiary’s benefit and to make adjustments where necessary with the added benefit of allowing the settlor to “train” the next generation of trustees to carry on conduct of the trust for the benefit of the primary beneficiary beyond the life of the settlor.

• Trustee Selection: We urge settlors to appoint trustees with sufficient expertise and understanding of the primary beneficiary’s needs.

• Protector Oversight: If the settlor requires this protection, we recommend choosing an impartial protector familiar with the trust's purposes and the primary beneficiary’s circumstances.

• Tax Review: Settlors should involve a tax advisor/financial planner to ensure compliance with Australian revenue laws and to maximise benefits.

If you have a trust matter you’d like us to assist you with or a family member with special needs, please contact us on 03 9450 9400 or send an email to info@andcro.com.au