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Special Needs, Special Trusts

When it comes to ensuring a loved one with a disability is taken care of, few things are more important than a well-considered plan. And yet, for many, it can often seem as if few things are more difficult than planning for a disabled family member. Often the difficulty arises from a confusion regarding the options that are available and a general lack of available information regarding these options. Our Advisory Estate Planning to Benefit Family Members with Special Needs provides an overview of many available options to address a variety of concerns faced by individuals planning for a disabled loved one.

One common concern is how to provide additional funds for a loved one receiving government benefits without jeopardizing them, although in some cases this will not be a concern, as family do not intend to preserve entitlement to government benefits. One planning technique is to set up a trust to provide a fund for financial support for the disabled person in addition to government benefits. A trust is a relationship in which title to property is transferred to a person (the “trustee”) who holds the property for the benefit of others (the “beneficiaries”). Typically, the terms of a trust are set out in a written trust agreement, if it is established during the transferor’s lifetime (an “inter vivos” trust) or in a will, if it is to take effect upon death (a “testamentary trust”). A testamentary trust may also be funded with the proceeds of a life insurance policy or a registered plan such as a registered retirement savings plan.

Where the disabled person is receiving Ontario Disability Support Program (“ODSP”) benefits and a trust fund is going to be part of the plan for their needs, a discretionary trust should be considered. A trust for this purpose is sometimes called a “Henson trust”. A Henson trust allows the trustees full discretion whether or not to make payments from income and capital to a beneficiary. The name of this type of trust comes from the name of the case in which the Court held that a discretionary trust that meets certain criteria is not an asset of the disabled beneficiary of the trust for the purpose of social benefits, such as ODSP, because he or she is not legally entitled to enforce payments of income or capital from the trust. The name otherwise has no legal significance or “magic” to it.

A Henson trust may be either inter vivos or testamentary. If it is testamentary, it may also qualify as a “qualified disability trust”, which is a special type of trust under the Income Tax Act (Canada). To qualify as a “qualified disability trust”, a beneficiary eligible for the federal disability tax credit must elect with the trustees on the trust’s tax return for the trust to be a qualified disability trust, subject to certain other conditions. Most types of trusts may qualify, and if a trust does qualify, it is taxed based on graduated tax rates, which allows income to be split between the trust and the beneficiaries. As well, since income retained in the trust will be taxed in a manner similar to individuals (with a few differences), the incentive to pay out income in order to reduce overall taxes is reduced. This is helpful, as it is not always appropriate to pay income to a beneficiary, for example if he or she is in receipt of ODSP benefits, since the current annual income limit for recipients under the ODSP rules is $10,000.

While both types of trusts can be useful for planning for a disabled loved one, and while a testamentary trust set up for a disabled beneficiary can be both a Henson trust and a qualified disability trust, the two types of trusts are not legally interrelated. A qualified disability trust is subject to more favourable income tax treatment, making it desirable, but not imperative, that a trust for a disabled loved one qualify as one. A Henson trust which does not qualify as a qualified disability trust will still function effectively for ODSP purposes. Also, a disabled person can have as many Henson trusts set up for their benefit as their family members wish, but only one trust at a time for any individual can qualify as a qualified disability trust.

Since each planning technique for a disabled family member has its own unique criteria and is useful for planning for certain goals, but not necessarily for others, it is important for families to educate themselves on the available options and carefully consider what their goals are. In this way, and with professional guidance, an integrated plan that should provide for the unique needs of their disabled family member can be implemented, providing not only for the disabled person, but also providing some much needed peace of mind for the family.