What is a Henson Trust (Absolute Discretionary Trust)?

A Henson Trust is an excellent way to allow for financial care for disabled children after the death of the parent(s). The terms Henson Trust, Absolute Discretionary Trust and Discretionary Trust are used interchangeably and refer to a very specific type of trust when used in the context of planning for a person with a disability.

The purposes of a Henson Trust are to protect the assets (typically an inheritance) of a disabled person, as well as that person’s rights to collect government benefits and entitlements.

The key provision of a Henson Trust is that the trustee has “absolute discretion” in determining whether to use the trust assets to provide assistance to the beneficiary, and in what quantity. This provision means that the assets do not vest with the beneficiary and thus cannot be used to deny means-tested government benefits.

In addition, the trust may provide income tax relief by being taxed at a lower marginal rate than if the beneficiary’s total assets were considered. It can also be used to shield assets from matrimonial division in case of divorce of the beneficiary. In most cases, the trust assets are immune from claims by creditors of the beneficiary.

A Henson Trust can be established either as an Inter Vivos (Living) or a Testamentary Trust (Created by last Will and Testament). The most commonly used type of Henson Trust is the Testamentary Trust established in a parent’s or caregiver’s Will.

History of the Henson Trust

Leonard Henson had a daughter named Audrey. Audrey was a person with a developmental disability and she lived in a group home managed by the Guelph Association for Community Living. Leonard knew that if he left his estate directly to his daughter, it would exceed the allowable asset limits as set out by the Family Benefits Allowance (now called the Ontario Disability Support Program). He realized that having assets in the hands of his daughter directly would not be to her advantage and that her benefits would be terminated until the assets were “spent down” to a level below the threshold amount. In addition, Leonard’s wife had pre-deceased him and he had no other family.

Leonard discovered a technique that would allow Audrey to retain her government benefits while at the same time allowing her to receive quality of life enhancements from his estate. That technique was the use of the Absolute Discretionary Trust to be created in his Will as a Testamentary Trust. The Will required the creation of an Absolute Discretionary Trust which appointed the Guelph Association for Community Living as Trustee and his daughter Audrey as beneficiary of the trust. Once Audrey died, his Will instructed that the remaining funds in the Trust were to be passed on to the Guelph Association for Community Living.

The Ministry of Community, Family and Children’s Services (the ministry which controls the FBA (ODSP)), determined that Audrey had inherited the estate of her father and since it was in excess of the allowable amount of assets, they terminated her benefits. The Guelph Association for Community Living challenged this decision and the Ministry took the trust and the Trustee to court. The first court found that the funds contained in Audrey’s trust account did not meet the FBA (ODSP) definition of assets and therefore, it ruled in favour of the Trustees. The Ministry launched an appeal. The appeal reached the Supreme Court of Ontario and in September of 1989 was dismissed. The court allowed the trust to benefit Audrey without affecting her government benefits.

That decision has enabled families who have a son or daughter with a disability and are residents of Ontario with a vehicle in which they can place assets for their children without disqualifying them from receiving the ODSP payments to which they would otherwise be entitled.

For further information or assistance, please contact Douglas Laughton, Partner, Tierney Stauffer LLP at 613-288-3225 or dlaughton@tslawyers.ca. If you have questions about trusts in general, you can contact us at 613-728-8057 or by e-mail at info@tslaywers.ca.

Douglas J. Laughton
B.A. (Hons.), LL.B.
Partner, Tierney Stauffer LLP

This article is provided  as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter  referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship. 

Estate Planning and the Use of the Henson Trust and RDSP

Many families include a disabled child or adult and the parents are usually the child’s primary safety net. The onus is on the parents (or parent as the case may be) to provide core support to their children whether financial, physical or emotional and the list of duties for the disabled child may well escalate to a point where many are overwhelmed.

The Ontario government can assist by offering a variety of valuable services that will assist the disabled child and his or her family.  In Ontario, one can turn to the Ontario Disability Support Program (ODSP) which was established to help people with disabilities in financial need pay for living expenses such as food and housing.

Given the circumstance a child’s disability will require lifelong treatment and support, a great concern for their parents is how to effectively plan for the care and protection for their child after the parents are no longer living.  In fact, special considerations are necessary for parents of a disabled child or adult to ensure the child’s ODSP’s benefits are not compromised by their estate planning. This is a situation where guidance from a professional advisor could provide great benefit.

The Smith Family

As an example of an estate planning strategy involving a disabled child, I introduce the Smith family.

The Smiths have two children, Corey and Ryan, who are both over the age of majority. Ryan is a disabled child who receives ODSP benefits. The Smiths’ combined Estate consists of their principal residence, RRSPs and other investments for a net value of $1,000,000. 

The Smiths are making their Wills and although they wish to have their Estate distributed in equal shares between their children their primary concern is to ensure that their estate planning does not disqualify Ryan from his ODSP benefits. They know the ODSP rules are complex.

What options are available to them?

Henson Trust

The popular and preferred option is the use of an Absolute Discretionary Trust (commonly referred as a “Henson Trust”) created under the parents’ Wills. The Henson Trust allows their Estate Trustee, Corey, complete discretion over the trust so that he may continue to pay the necessary expenses of the disabled child. As a result of the Henson Trust, the Smiths have the assurance that Ryan shall be provided for in the years to come while knowing that he cannot compel Corey to make payments.

Ryan’s ODSP benefits shall not be compromised since the funds held in the Henson Trust are not considered his assets for ODSP purposes; that is because Corey, as Estate Trustee, has absolute discretion in the management of the trust.  Furthermore, Ryan’s income from the Henson Trust for non-disability related expenses, such as food, clothing, housing and entertainment, can be substantially supplemented without suspending or affecting the ODSP benefits. 

Also, depending on the parents’ wishes and in appropriate circumstances, the Henson Trust may also allow for income sprinkling by empowering the Trustee to “sprinkle” income among several beneficiaries.  

ODSP guidelines recognizes the Henson Trust as an exempt asset of the disabled child and as a result, it remains the most valuable option available as it represents a safety net for Ryan after the death of his parents. 

Registered Disability Savings Plan

The Registered Disability Savings Plan (“RDSP”) was introduced in December 2008. The RDSP allows for a combination of individual, family and government financial assistance contributions to assist people with disabilities to grow, manage and control a financial asset. 

To open an RDSP, one must qualify for the Federal Disability Tax Credit (DTC).  If a child or grandchild qualifies for the DTC the parent, grandparents or other legal representative may establish and contribute to an RDSP up to a lifetime maximum of $200,000.  The DTC-eligible person shall be the sole beneficiary of the RDSP.

As a result of opening an RDSP, annual contributions will attract:

• Canada Disability Savings Grants (CDSGs) at a matching rate of 100, 200 or 300 percent depending on the family income and the amount contributed up to a maximum lifetime CDSG limit of $70,000; and

• Canada Disability Savings Bonds (CDSBs) of up to $1,000 per year for low and modest-income families[1] for a lifetime maximum of $20,000. 

The most obvious thorn in establishing an RDSP is the matter of capital contributions (which are not deductible) as not everyone is in a position to fund such a plan. One strategy is to insert a clause in the parents’ Wills instructing the Estate Trustee to fund the RDSP with the disabled child’s share. 

The RDSP, like the Henson Trust, is an exempt asset for ODSP purposes and therefore the benefits of the disabled child contained therein will not be compromised.

The 2011 Federal Budget addressed the difficulty of funding an RDSP by creating a new funding option permitting conditional rollovers of RRSPs into RDSPs. Indeed, as of July 1, 2011, for deaths occurring after March 3, 2010, one may now roll the deceased parent’s RRSP proceeds into the RDSP of the disabled child on a tax-free basis.  This new rule extends to amounts transferred to an RDSP from the proceeds of a Registered Retirement Income Fund (RRIF) and certain lump-sum amounts paid from Registered Pension Plans (RPP). 

Ideal Estate Planning for the Smiths

The Smiths now have two valuable options available to them where they can provide for Ryan with the assurance that his ODSP benefits will not be jeopardized.  Their Wills could provide that their RRSPs (or a portion of them) be rolled into an RDSP on a tax-free basis.  If there is still “room” in the RDSP (that is if the RRSPs have not reached $200,000.00), then their Wills may also provide for a portion of Ryan’s share in the Estate to be paid into the RDSP up to the threshold value.  The remainder of Ryan’s share in the Estate shall be transferred into a Henson Trust for his benefit.  Corey would be the Trustee of the Henson Trust and would administer the trust for Ryan’s benefit. 

If the Smiths each maintained a modest life insurance policy (of $50,000 for example), they could name both of their children as alternate beneficiaries (the surviving spouse would be the first named beneficiary). If that is the case, Ryan and Cory would both receive $50,000.  In such instance, a life insurance trust could be created in which he would deposit the life insurance proceeds. Such a life insurance trust has a threshold of $100,000.

The proceeding examples explain how the Smiths are able to provide for Ryan without compromising his ODSP benefits through careful estate planning. 

Cautions

There are drawbacks to both a Henson Trust and RDSP that ought to be considered.  We recommend you consult with a professional so that those drawbacks be clearly highlighted and discussed. Ultimately, the estate planning must be tailored to the circumstances and the parents must decide what is feasible given their intentions and their means and the size of their family.

Conclusion

From the foregoing one can appreciate the tremendous advantage of Ontario parents having effective Wills in place is underscored when their child is disabled. The impact on that child’s future may be profoundly affected for the better.

If you have any questions, please do not hesitate to contact me directly 613.288.3220 or by email at sdesmarais@tslawyers.ca

Sébastien Desmarais, Associate

 

This article is provided as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter referenced in this document before making decisions.

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[1] When the household net income is under $21,816.00.