Planning for disabled beneficiaries (Henson trusts)

Preserving an Inheritance for a Family Member Collecting a Disability Pension

In providing financially for a disabled family member, whether during one’s lifetime or upon one’s death, care should be taken so as not to impair the disabled family member’s entitlement to income support and other benefits from the provincial government. In Ontario, disabled adults are entitled to receive income support and extended health care benefits pursuant to the Ontario Disability Support Program Act, 1997 (the “ODSPA”) provided, among other things, they do not own assets worth more than $5,000; and they do not receive gifts or other voluntary payments of more than $4,000 over a 12 month period.

In determining the value of an applicant’s net assets for the purposes of determining the individual’s entitlement to support, certain items are excluded from the calculation including the value of the applicant’s principal residence and the value of any interest the applicant holds in a trust derived from an inheritance or the proceeds of a life insurance policy provided the capital of the trust does not exceed $100,000. In determining the level of an applicant’s income, payments used to fund the purchase of approved disability related items and services are excluded from the calculation.

In some cases, an individual may wish to set aside more than the $100,000 limit currently prescribed under the ODSPA for a disabled family member. As long as the assets are settled in a discretionary trust, the disabled family member would likely continue to be eligible to receive income support and extended health care benefits. A trust is “discretionary” if the trustees have absolute discretion as to the timing and amount of any distributions made from the trust. Often referred to as a “Henson” trust in this context, distributions from a discretionary trust will not prejudice the disabled family member’s entitlement to benefits under the ODSPA, provided the trust is established and operated in a prescribed manner.

In a typical Henson trust, the trustees make distributions to the disabled family member for a specified period of time, usually the lifetime of the disabled family member. At the end of the specified period, the assets held in the trust are distributed to one or more persons or organizations identified by the person who “settled” the trust (the settlor) or the trustees. As set out above, the key feature of such trusts is that the trustees retain absolute discretion to decide when and how much will be paid to the disabled family member. Put another way, the disabled family member’s interest in the trust does not vest.

Careful consideration should be given to the choice of trustees of a Henson trust. It is possible to appoint one or more siblings, close family members, trusted advisors or trust companies. A sibling is often a logical choice since he or she is likely to be close in age to the disabled family member. That said, if the sibling is entitled to receive any or all of the trust property (whether during the lifetime or upon the death of their disabled brother or sister), he or she has a potential conflict of interest and likely should not act. Appointing a corporate trustee, i.e. a trust company, may make sense especially where there are no close relatives able or willing to act or where the trust is likely to be administered over a lengthy period of time.

While most Henson trusts are established pursuant to a will, an individual with sufficient assets may also want to consider establishing a Henson trust during their lifetime. An inter vivos Henson trust would benefit the disabled family member in the manner outlined above. Provided that care is taken in establishing and administering the trust in a prescribed manner, such trusts can:

1. Result in an overall saving of income tax: any income earned by the trust could be taxed at the marginal tax rate of the disabled family member rather than at the highest marginal rate which is applicable to inter vivos trusts provided that the trustees filed the necessary elections with Revenue Canada, that the settlor of the trust cannot exert positive or negative control over the administration of the trust, and that the settlor is not entitled to any of the trust property.

2. Ensure that the disabled family member is provided for financially, even in the event of the subsequent incapacity of the parent who established the trust; and

3. Avoid the payment of estate administration taxes (often referred to as probate fees) payable on the property settled in the trust by the parent insofar as those assets would transfer to the residual beneficiaries of the parent who established the trust outside the estate.