Ram, the author of The Canadian Capitalist blog, recently wrote on the new RDSP program (Registered Disability Savings Plan) being offered by the government. I left a comment on the discussion mentioning that Henson Trusts are also worth looking at if you or someone you know has a family member who qualifies for Disability Support from the Government. Ram proposed that I write up a post on it, and I am dutifully obliging! :)
Here it is in a nutshell:
To qualify for Disability Support from the Government in the form of either payments or access to certain benefits (e.g. dental benefits, eye glasses, guide dog allowance, etc.) requires that you fall below certain income and asset levels. If you have too much income or too many assets, your assistance is reduced or cut-off altogether.
If someone closely related to the disabled person dies and leaves their estate to the disabled person, the inheritance may violate the eligibility to receive further support (since the assets/income may be too high now). A Henson Trust allows for the assets of the deceased to pass to an "Absolute Discretionary Trust", and therefore fall outside of the estate of the disabled – thereby allowing the support benefits to be maintained while still providing for the ability to increase their quality of life from the assets left to the trust.
The name Henson trust refers to the name of the strategy as opposed to the actual type of trust you set up. The actual trust you set up is an Absolute Discretionary Trust. The name of the strategy comes from the person who first engaged it: Leonard Henson from the Guelph, Ontario area. He had set up the absolute discretionary trust for the ultimate benefit of his daughter Audra. The structure was challenged by the government, but after a number of appeals the strategy was upheld and has since been referred to as the "Henson Trust".
Some Useful Details
It is important to recognize that you must find an extremely reliable trustee (person or entity who administers the trust), because as the name implies the trustee will have absolute discretionary power over the trust. It is specifically this reason that the courts have allowed the assets in a Henson trust to NOT count towards the asset/income test for disability support eligibility. In other words, the disabled will technically not have any say in the governing of the trust. It is not uncommon to assign co-trustees in the form of a trusted family member in conjunction with a corporate trustee.
The trustees may use the funds as they wish for the benefit of the disabled person: they could pay for a trip to Europe, hire a full-time nurse, etc. But the disabled person has no right to demand money from the trustees. In fact the trust agreement or will should indicate that the trustees have the power to withhold income and capital as they see fit.
You can create a testamentary trust (which means it is created upon your death – "your last will and TESTAMENT") or you can create an inter-vivos trust (from the latin roots meaning "between" the "living"). As a general rule of thumb: Trusts are separate tax-payers in the eyes of the government, but Testamentary trusts are taxed with the same graduated tax rates of an individual while Inter Vivos trusts are generally taxed at the highest provincial and federal rates on all income. There is one additional provision allowable for inter vivos trusts when the beneficiary is a Preferred Beneficiary (by way of disability – subject to qualification) – it is possible to have income retained in the trust but taxed at the preferred beneficiary’s tax rates. (You’ll need to seek a qualified lawyer for clarification for your own situation and the viability of doing so.)
If you know of someone who has a family member who qualifies for disability support payments from the government, you may want to refer them to look into the Henson Trust strategy. They can allow for disabled persons to continue to receive vital disability support and program benefits in addition to benefiting from the estate of a deceased person – resulting in the maintenance or increase of quality of life.
You will definitely want to find a lawyer in your province to assist you though, as the structure is either challenged (Northwest Territories, Nunavut, Newfoundland) or not allowed (Alberta) in a handful of provinces/territories. It IS ALLOWED in: Ontario, BC, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, and PEI).