Ensuring that your loved ones are cared for after your passing is a common goal for many Canadian families. This is especially relevant where your loved one is a person with disabilities. However, even the most well-intentioned gifts can have unforeseen financial implications.
It’s important to ensure that your chosen beneficiary’s government income, such as social assistance benefits, is not reduced by any gifts left in your will. You may therefore wish to consider using a Henson Trust, among other estate planning strategies, as part of your overall estate plan.
The limits to social assistance benefits
All provinces and territories have laws and regulations governing social assistance and support programs, with many having supports in place for people with disabilities. To qualify for these supports an individual must demonstrate “need”, which is based on both their income and the assets they hold.
If a gift or inheritance, which may be intended to support the person, inadvertently pushes them above the eligibility criteria, the government supports they may need can be denied.
What is a Henson Trust?
A fully discretionary trust — or Henson Trust (named after the court ruling that formalized it as a financial planning strategy) — is used in financial planning for people with disabilities. The idea is to structure a large amount of money that is left or given to a person with disabilities in such a way as to avoid social assistance benefits from being reduced. These trusts may also offer certain income tax advantages.
Once set up, the trustee of the Henson Trust (the person assigned to manage the trust) has full control over when money is handed out to the beneficiary (the person with a disability for whom the trust has been set up).
In order to have an effective Henson Trust, two main criteria must be fulfilled:
- The inheritance must be paid to the trust and not to the beneficiary.
- The terms of the trust must be sufficiently “discretionary”. This means that the assets will be managed on behalf of the beneficiary, but legal ownership will be held by the trust and trustee (except in Quebec where a separate trust “patrimony” is created).
Pros and cons of a Henson Trust
There are some key advantages of opening a Henson Trust for a family member with disabilities:
- If the beneficiary receives the Disability Tax Credit, it could be taxed as a qualified disability trust, which can bring tax savings.
- There is generally no maximum contribution limit.
- The assets held in the trust will typically not count against the social assistance asset limits of the beneficiary, although distributions from the trust to the person with disabilities may count against their social assistance income limits.
- Having control of the trust in the hands of a trustee can avoid mismanagement of the money by the beneficiary or potential financial abuse from others.
There are some potential disadvantages regarding a Henson Trust that you should also be aware of:
- It can be complex and costly to set up and maintain (including initial legal fees, ongoing accounting costs and trustee fees).
- For some beneficiaries, having the distribution of the money in the hands of a trustee may be frustrating, particularly among those people who are capable of managing their own finances.
- There is potential for mismanagement of funds if the trustee is ill-equipped to manage a trust or is untrustworthy.
- If the trustee provides the beneficiary with too many funds at once, this could reduce their social assistance benefits.
- Changing or dissolving a Henson Trust can often require court involvement.
How do I choose a trustee for a Henson Trust?
While almost anyone can be chosen to act as a trustee of the Henson Trust you create, you need to be sure that they’re sufficiently trustworthy. Other questions that should be considered include:
- Is the trustee a mature adult?
- Is the trustee willing and able to act?
- Does the trustee have a relationship with the beneficiary or are they willing to develop one?
Since the trust is designed to last the lifetime of the beneficiary, further thought should be given to appointing alternate trustees, under the same considerations given above. If there is no one to suit the role of trustee, consider appointing a corporate trustee.
Other planning opportunities
Simply creating a Henson Trust in your will is not the only method by which you can care for a loved one living with disabilities. Depending on which province or territory you live in, the Henson Trust you create may be considered a qualified disability trust (QDT).
A QDT allows for the reduction of taxes payable on income earned in the trust, allowing more money to be saved for the times when it’s most needed.
Henson Trust vs. RDSP
A Registered Disability Savings Plan (RDSP) can often be a complement to a Henson Trust. It’s a federally regulated savings plan designed to help provide long-term financial security for people with disabilities. It provides tax-deferred growth on contributions of up to $200,000, as well as up to $70,000 in federal grants and $20,000 in federal bonds. Tax-deferred growth means you don’t pay tax on any interest, dividends or capital gains earned until the money is withdrawn.
Withdrawals from an RDSP are typically either fully or mostly exempt from any social assistance benefit “income” tests.
While a Henson Trust and RDSP share some common traits — such as being designed to help a person with disabilities have a more financially secure future — there are some key differences:
- Contributions to an RDSP can begin at any time in the beneficiary’s life. Henson Trusts are often (though not exclusively) created from assets left in a will (usually after one of the beneficiary’s parents dies).
- To open an RDSP, the beneficiary must have qualified for the Disability Tax Credit. This does not have to be the case for beneficiaries of Henson Trusts.
- RDSPs have a contribution limit, whereas Henson Trusts do not.
- RDSPs can receive government grants and bonds (as shown above); Henson Trusts cannot.
Get help with Henson Trusts and other financial planning tools for people with disabilities
Certain types of planning strategies, especially direct beneficiary designations, can have a negative impact on the effectiveness of Henson Trusts. Without proper planning, the amount of money available to fund a Henson Trust can be reduced, and if the disabled person is a direct beneficiary, benefits could even be denied, despite a Henson Trust being in place. A thorough review of your estate plan can help identify and address any potential complications before they become a problem.
As you can see, estate planning around every contingency can become overwhelming. By working together with your IG Advisor, you can ensure that the right steps are being taken to secure your legacy and protect your loved ones. Please ask your IG Advisor for a copy of our white paper entitled “Leaving an inheritance to a person with disabilities” for further information. If you don’t have an IG Advisor, you can find one here.
Written and published by IG Wealth Management as a general source of information only, believed to be accurate as of the date of publishing. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on up to date withholding rules and rates and on your specific circumstances from an IG Wealth Management Advisor. Trademarks, including IG Wealth Management and IG Private Wealth Management are owned by IGM Financial Inc. and licensed to its subsidiary corporations.
The Canada Disability Savings Grant (CDSG) and the Canada Disability Savings Bond (CDSB) are provided by the Government of Canada. Eligibility depends on family income levels. Speak to an IG Wealth Management Advisor about special RDSP rules; any redemption may require repayment of the CDSG and CDSB.
