A Henson Trust alternative

Proper estate planning is essential to protect a disabled beneficiary. What’s more, if she receives benefits from the Ontario Disability Support Program (ODSP), a poorly planned inheritance can render her ineligible to receive benefits.

Unfortunately, this happens all too often because people fail to understand the options available to maximize benefits to the disabled beneficiary.

To qualify for ODSP benefits, a recipient must meet income and assets limits in order to qualify for and receive payments from ODSP. So, gifts and inheritances must be carefully planned to avoid disqualifying a disabled beneficiary from further benefits.

The most common planning tool is the Henson Trust. This is an absolute discretionary trust that gives a disabled beneficiary no right to enforce payment of either income or capital. As a result, the capital of the trust does not count toward the recipient’s asset limit, and only the income actually paid to the recipient is counted toward the income limits.

There is no limit on the value of the assets that can form part of the Henson Trust. But if too much income is paid, the recipient’s ODSP payments may be cut back or lost. Specifically, ODSP regulations allow a recipient to receive a maximum of $6,000 in any 12-month period “for any purpose” from gifts, inheritances, insurance proceeds, trusts, and certain other voluntary payments such as honorariums and lottery winnings.

An ODSP recipient can receive a maximum of $6,000 from all such sources, not $6,000 from each of those sources. This represents a significant limit to the usefulness of a Henson Trust.

Other options

A recipient may receive amounts, including distributions from a trust, for the purpose of contributing to her Registered Disability Savings Plan (RDSP). These gifts are in addition to the $6,000 annual income limit, and will not affect the recipient’s ODSP payments if the recipient makes the contribution to her RDSP as soon as possible.

An RDSP and its income are exempt from the asset limit. So, people can give a disabled beneficiary up to $200,000, the RDSP’s maximum lifetime contribution limit, without affecting his benefits. What’s more, the Canadian government will provide matching grants for contributions, and a bond for low-income beneficiaries.

ODSP benefits terminate at age 65, and payments from an RDSP must commence by the end of the year when the RDSP beneficiary turns 60. So the RDSP can provide an additional income stream between ages 60 and 65 without any loss of ODSP benefits.

Leaving inappropriate gifts

Often, well-intended people leave outright gifts by will to a disabled friend or relative, and those gifts count toward a recipient’s asset limit.

Luckily, there is a planning option available to protect ODSP benefits if the inheritance amounts to $100,000 or less. The ODSP regulations exempt up to $100,000 held in a trust from the asset calculation. That income and capital must be available to be used for the recipient’s maintenance.

An “available to be used” trust may be established by the recipient, or someone else with the necessary legal authority. The $100,000 limit applies both when the trust is established and going forward. If the trust starts out with less than $100,000 but through capital growth and retained income exceeds $100,000, the ODSP recipient may lose her entitlement. It’s best to fund these trusts leaving room for growth. If the trust is created after a gift is received, the funds will be counted as income in the month received.

Say Samantha’s grandfather dies and his will gives her $75,000. Samantha receives the gift on July 3 and transfers it to a trust on July 15. She will be considered to have $75,000 income in the month of July, and will have to repay her July ODSP benefits. If instead the grandfather had left the $75,000 to a Henson or “available to be used” trust, Samantha would have lost no benefits. Either way, once in an “available to be used” trust, the $75,000 will not count toward Samantha’s asset limit.

Once an inheritance is in a Henson Trust or an “available to be used” trust, there are tools to maximize their usefulness. As noted above, a recipient is entitled to receive a total of $6,000 in any 12-month period from the trust and other acceptable sources “for any purpose.”

However, in addition to the $6,000 amount, the ODSP regulations permit a recipient to receive an unlimited amount from these sources if the amounts are used for disability-related items or services that are pre-approved in writing by the Director of ODSP.

There is no fixed list of disability-related items or services. Depending on the nature of a person’s disability, it may be possible to obtain approval for such things as cleaning or transportation services, a gym membership, or grooming expenses. Establish that the expenditures are disability-related, so it’s crucial to have the advice and assistance of the recipient’s healthcare practitioners.

The Disability Amount is another means of maximizing the usefulness of a trust. To claim it, the recipient must apply to CRA for approval with the support of a form completed by a doctor.

If the beneficiary qualifies, the trust may claim a preferred beneficiary election. Normally, income earned and retained in a trust is taxed inside the trust. If income is distributed in the year it is earned to a beneficiary, it may be taxed in the beneficiary’s hands or inside the trust (it is usually best to get an accountant’s advice on which should pay the tax).

The preferred beneficiary election allows the trust to retain income, but allocate it to the beneficiary for tax purposes.That is, the income may be taxed in the beneficiary’s hands without distributing it to him. This helps whenever the beneficiary pays tax at a lower rate than the trust would. It is especially useful for an “available to be used” trust that’s not established by a will.

Such trusts pay tax at the highest marginal rate on all their income. The election also permits maximum tax efficiency without distributing so much income that ODSP payments are cut back.

The planning opportunities for disabled beneficiaries begin with the donor’s estate plan, but continue as outright inheritances and trusts are administered.And when planning to protect a disabled beneficiary who receives ODSP benefits, it is important to follow ODSP rules. A recipient is obligated to notify ODSP of inheritances, and failure to do so may result in the termination of ODSP benefits. Darren Lund is an associate in the Toronto office of Borden Ladner Gervais LLP whose practice is focused on estate planning and administration. Darren can be reached at 416.367.6358 or dlund@blg.com.