Protecting the interests of a beneficiary with special needs calls for a truly team effort.
When I work with the parents of disabled children, I encourage them to assemble a group of trusted professionals who can work together with the common aim of setting up their loved one financially well into the future.
In addition to an experienced estate planning lawyer who can draft the wills, powers of attorney and trusts they need, an accountant or specialist tax lawyer can help ensure that any money distributed to a beneficiary from a trust or estate is properly allocated and accounted for in the most tax-efficient manner.
A good financial planner is also an essential part of the equation so that trust funds are appropriately invested over an extensive enough period to meet the child’s needs long after their parents are gone.
Every person with a disability has unique medical and financial needs that vary wildly depending on factors such as age, family support and government benefits.
From my perspective as an estate planning lawyer, the best way to proceed is to sit down in one room with the family and their other professional advisors to develop a long-term plan tailored to the beneficiary’s particular circumstances. Below are just a few of the legal options we will consider:
Registered Disability Savings Plan
An estate plan is about much more than drafting your will, and there is plenty a parent can do for their disabled child while they are still alive.
Family members of a person who qualifies for the federal Disability Tax Credit can start a Registered Disability Savings Plan (RDSP) on their behalf. These accounts work similarly to Registered Retirement Savings Plans (RRSPs), allowing for tax-deferred growth on investments, but owners can also take advantage of matching contributions from the Canadian government.
Testators may also use their wills to rollover funds on a tax-free basis from their own registered plans into an RDSP that has not already hit the $200,000 contribution limit.
Henson Trust
This unique brand of testamentary trust is generally the central plank of any estate plan for a disabled beneficiary because it allows them to receive funds without endangering their entitlement to Ontario Disability Support Program (ODSP) benefits and any other support they receive from the program, which may include housing and coverage for medical bills.
Funds in a properly drafted Henson Trust do not count towards the $40,000 total asset limit that the ODSP sets for recipients, and beneficiaries may be able to receive as much as $10,000 per year directly from the trust without threatening their ODSP eligibility, depending on their circumstances and other sources of income.
Henson Trustee
The distinguishing factor that sets a Henson Trust apart from any other type of inter vivos or testamentary trust is that it is “fully discretionary.” In plain English, this means that the trustee alone gets to decide exactly how much to distribute to the beneficiary and when.
If this sounds like an extraordinary amount of power, that’s because it is. And it’s also why you must take extreme care when picking a suitable trustee. This is not the job for a jealous sibling or a disgruntled relative hoping for a bigger share of your estate.
But it’s not just spiteful mismanagement that testators need to be wary of in a Henson trustee appointment. Well-intentioned overpayments from the trust could do just as much damage if they take the beneficiary over their ODSP limits and jeopardise their membership in the program.
Testators can leave instructions for the trustee, explaining how they want money to be distributed, but there is nothing they can do to bind the trustee to their wishes. For this reason, some people are more comfortable appointing a corporate trustee to administer the trust. Whoever they end up choosing, testators should also name an alternate trustee, just in case their original pick is unable to take charge when the time comes.
Qualified Disability Trust
Appropriately drafted, a trust whose beneficiary lives with a disability will also meet the requirements of a QDT — the only type of Canadian trust that the federal government still allows to be taxed at graduated rates. Since 2016, income generated by any other type of trust is subject to tax at the top marginal rate of taxation.
If you have a beneficiary with a disability and are concerned about their long-term financial security, schedule a consultation with me, and we can review all the critical issues together.