Prior to the introduction of the Registered Disability Savings Plan (RDSP) in 2008, the most prudent financial planning tool for parents with a child suffering from prolonged and severe disabilities was the Henson trust. RDSPs have not made the Henson trust obsolete; it can be used jointly with the RDSP to optimize the long-term savings opportunities.
Trusts
A trust is a legal arrangement whereby property is held by one person (the Trustee) for the benefit of another (the Beneficiary). A trust is created when a person (the Settlor) transfers property to a trustee. The relationship is often created by a will or other written agreement (trust instrument). There can be more than one trustee and multiple beneficiaries.
A trust can be discretionary or non-discretionary. In a discretionary trust the beneficiary has no control over the property in the trust. The trustee has complete authority (discretion) to decide what to do with the trust property. In a non-discretionary trust, the trustee does not have total authority over the trust property. The beneficiary may have some control over the property or the trust instrument may require the trustees to take certain actions.
Henson trusts
A Henson trust is completely discretionary. In 1989 the Ontario Court of Appeal ruled that a person suffering from significant disabilities could inherit an amount in a discretionary trust and remain eligible to receive government support, such as Ontario Disability Support Payments (ODSPs). Prior to this ruling, all of the assets of a trust would have to be liquidated before the person could be eligible for the disability support payments.
Since the trust is completely discretionary and the beneficiary has no ability to control the trust’s assets, most provinces allow specific funds to be provided for the beneficiary without affecting the beneficiary’s entitlement to provincial government benefits. RDSPs are also exempt from the asset test for most provincial benefits.
Henson trusts versus RDSPs
The ability to receive of Canadian Disability Savings Bonds (CDSBs) and Canadian Disability Savings Grants (CDSGs) is a major consideration in the decision to open an RDSP. This consideration is less of a factor for higher income families or beneficiaries as the eligibility for CDSBs and CDSGs is based on an income test. Further, there are other costs associated with establishing and maintaining the trust that are not required to establish an RDSP.
The Henson trust is a much more flexible vehicle than the RDSP. Unlike the RDSP, funds contributed to a Henson trust can revert back to the contributors or be distributed to other family members when the beneficiary dies. The trustee of the Henson trust can make discretionary payments to the RDSP to attract matching grants.
There is no contribution limit for a Henson trust. Contributions (not including government contributions) to an RDSP are subject to a lifetime contribution limit of $200,000. Further, there is no Disability Tax Credit eligibility requirement for Henson trusts.
In the case of a beneficiary that lacks the capacity to make a will, the distributions of any remaining funds in a RDSP will be determined by provincial intestacy rules. Contrast this with a trust whereby upon the death of that beneficiary, the assets of the trust can flow directly to the beneficiaries as designated. Further, the Henson trust allows for greater control of funds. This can be important for beneficiaries that lack capacity, are not financially savvy or a spendthrift.
There is no restriction on the timing of payments from a RDSP and can be used for any purpose. However, certain plans will require money to be paid back to the government under the assistance holdback rule. This was particularly true before the proportional repayment rule was introduced, reducing the penalty for taking money out of the plan in the first few years.
There is no requirement to take payments from the Henson trust. Annual payments, referred to as Lifetime Disability Assistance Payments (LDAPs) must begin no later than the calendar year in which the beneficiary reaches the age of 60. The LDAP payments are governed by a formula designed to ensure that payments out of the plan will extend over the beneficiary’s lifetime. In the case of a shorted life expectancy, formula does not apply.
Working together
The RDSP and Henson Trust are excellent financial planning tools for individuals suffering from disabilities and their families. They can be used together to help accomplish the goal of providing for the future of an individual without forgoing government benefits. At Siskinds we understand the challenges of planning for the future care of individuals suffering from disabilities.