Estate planning and the disabled beneficiary

For thousands of Canadian families, estate planning is complicated when a loved one has a disability. Typically, the family member with the disability requires financial or money management assistance, and receives provincial disability benefits. Because entitlement to most provincial benefit schemes is contingent on income or capital, if the family member is a beneficiary and receives their share of an inheritance outright, benefits may be lost.

One tool available to these families is the Henson trust, which can be set up on a testamentary (established by a deceased person) or inter vivos (established by a living person) basis. Most provincial regulations allow individuals receiving disability payments to receive discretionary amounts from third parties, and a properly drafted Henson trust provides the trustee(s) with unfettered discretion to make such payments. The beneficiary has no right to the income or capital, so the trust generally isn’t considered when determining entitlement to provincial benefits.

Before a Henson trust is established, the following factors should be considered:

Beneficiary’s age

Provincial disability benefits are typically paid up to age 65, after which time the disabled beneficiary is eligible for seniors benefits such as Old Age Security and the Guaranteed Income Supplement. If the beneficiary is close to 65, consider whether a Henson trust is the most suitable option and whether the trust proceeds should be paid when the beneficiary reaches age 65.

Nature and value of the inheritance

If the estate is relatively large with few beneficiaries, consider whether the beneficiary would want to discontinue receiving provincial benefits and instead be supported by their share of the estate. Answer these questions:

• Is the inheritance sufficient to meet the lifelong costs associated with the beneficiary’s disability, including potential future increases in costs?
• Would medication benefits or housing subsidies be affected if the inheritance is paid directly to the beneficiary? If so, is the inheritance sufficient to cover those ongoing costs?

 Read: Supreme Court ruling a reminder to advisors about disability planning tool

Nature of the beneficiary’s disability

Even if income support benefits aren’t required because the inheritance is sufficient to meet all the beneficiary’s needs, the beneficiary may still require that the funds be professionally managed by a trustee through a trust.

Beneficiary’s desire to continue to receive provincial benefits

There are cases where a beneficiary’s experience is so negative with provincial regulators that the beneficiary may wish to live off their inheritance and reapply for benefits once the money runs out. When the beneficiary reapplies, their bank statement may be reviewed to determine if they unreasonably spent the inheritance to qualify for benefits. If so, the application may be denied.

Tax minimization

Prior to recent amendments to the Income Tax Act, testamentary trusts were taxed at graduated tax rates, and trusts created for tax-splitting purposes were common. However, today, unless a trust is a qualified disability trust—which requires eligibility for the federal disability tax credit and is available only in certain circumstances—income retained in the trust is taxed at the highest marginal rate. If tax savings is the predominant goal, the trust might not be the best option to protect the disabled beneficiary.

To avoid having the income taxed at the highest marginal rate, the family can take advantage of the preferred beneficiary election, which provides that income can be taxed in the hands of the beneficiary even though the funds were retained in the trust. For the preferred beneficiary election to apply, the following conditions must be met:

• The beneficiary of the trust suffers from a severe and prolonged mental or physical impairment.
• The beneficiary is related to the person establishing the trust, and is their spouse or common-law partner, child, stepchild, grandchild, step-grandchild, great-grandchild or step-great-grandchild.

Finally, as with any trust, an understanding of the associated administrative and financial costs must be considered relative to the preservation of benefits.

Henson trusts aren’t recognized in all provinces and aren’t right for all families. However, if, after considering the various planning factors, the Henson trust is right for your client’s situation, it provides peace of mind for the family.

Keith Masterman, LLB, TEP, is vice-president, Tax, Retirement and Estate Planning at CI Investments. He can be reached at kmasterm@ci.com.

Keith Masterman

Tax & Estate

Keith Masterman, LLB, TEP, is vice-president, Tax, Retirement and Estate Planning at CI Global Asset Management. He can be reached at kmasterm@ci.com.