Leaving an inheritance to someone you love is an act of care. But where that person is vulnerable being through age, disability, addiction, financial difficulty, or relationship instability, an unprotected inheritance can do more harm than good.
There are a range of tools available to ensure that an inheritance reaches a vulnerable beneficiary in a way that genuinely protects them. The key is knowing which tool is right for the situation, and ensuring the planning is done before it is needed.
Who counts as a vulnerable beneficiary?
Vulnerability takes many forms. In an estate planning context, it commonly includes:
- Minor children
- Adults with intellectual disability or cognitive impairment
- People with mental illness or a history of mental health challenges
- Beneficiaries struggling with addiction or financial instability
- People in relationships at risk of breakdown
- Elderly beneficiaries at risk of exploitation or undue influence
The right protective structure depends on the nature and likely duration of the vulnerability, the size of the inheritance, and the family dynamics involved.
Testamentary trusts
A testamentary trust is a trust created within a Will and only comes into effect on the will maker’s death. Rather than passing assets directly to a vulnerable beneficiary, the assets are held and managed by a trustee of the will maker’s choosing. The trustee is often a trusted family member or adviser.
Testamentary trusts offer meaningful protection in several ways:
- Assets held in trust are generally protected from a beneficiary’s creditors and from family law property settlements;
- The trustee controls the timing and manner of distributions, allowing for staged or conditional access; and
- Income splitting within a testamentary trust can offer tax advantages for families with minor beneficiaries.
For families with a vulnerable beneficiary, a testamentary trust is often the most protective yet flexible tool available
Read more on testamentary trusts, what families need to know and whether they can be contested.
Special disability trusts (‘SDT’)
Where a beneficiary who meets the statutory definition of “severe disability” under the Social Security Act 1991 (Cth), a special disability trust may be appropriate. An SDT allows assets to be held for the care and accommodation needs of a person with a severe disability, whilst still allowing certain Centrelink concessions to continue to apply.
Special disability trusts have specific eligibility requirements and structural rules. They are not the right tool in every case, but where they apply, they offer both protection and meaningful financial advantage.
Protective provisions in a Will
In some cases, rather than establishing a full testamentary trust, targeted protective provisions within the Will can achieve the right outcome. This can include:
- Directing that a gift be held until a beneficiary reaches a specified age;
- Appointing a guardian or administrator to manage funds on behalf of a beneficiary; and
- Including a spendthrift clause that limits a beneficiary’s ability to assign or anticipate their interest.
These provisions require precise drafting to be enforceable and effective.
The role of the trustee
Whichever structure is adopted, the selection of the right trustee is a critical decision. A trustee of a testamentary trust owes fiduciary duties to the beneficiary, this means they have a duty of loyalty, care and impartiality. Choosing someone who combines trustworthiness, practical capability and the ability to manage family dynamics is just as important as the legal structure itself.
In some situations, particularly where the family dynamic is complex or the inheritance is substantial, a professional trustee may be more appropriate than a direct family member.
Planning ahead protects the people you care about most
The most effective protection for a vulnerable beneficiary is to ensure the protection is in place before it is needed. A Will that simply passes assets outright, with no protective structure, leaves the inheritance exposed at precisely the moment the beneficiary is least equipped to manage it.
At Solomon Hollett Lawyers, our experienced estate planning lawyers guide families through these decisions with care and precision. We can help you create an estate plan that protects the people who matter most and ensures their needs are provided for well into the future.as long as they need it.
