Name trustees for clients with disability trusts

Liz and Mike are both accountants in their late 40s. Their only child, Jordan, is 16 and has Down syndrome. He’s living a happy, fulfilling life, and his parents plan to put away money to cover needs he may have after they pass away. They want to create a Henson Trust, a fully discretionary trust that can grow to any amount without affecting certain means-tested government benefits. Since the trustee will have full control over distributions, choosing the right person is critical. Plus, since the couple plans to make the trust testamentary (effective after one or both parents die), they need to get the details correct now.

Who do you call?

Trust and estate lawyers, and financial advisors.

What they say

Sadie Wetzel:

Are other family members close to Jordan, or do Liz and Mike have friends who would take on the role? Naming a sibling may create a conflict of interest if surviving family members get whatever’s left when Jordan dies. In such cases, the couple might want to involve a professional trust company or a third party to serve as co-trustee. Many families also turn to trust companies if they don’t have anybody suitable to act as trustee.

When choosing trustees, we tell clients to consider:

• The age of proposed trustees and their health. You want someone who’s going to be around after you die—ideally for the child’s lifetime.
• Their business experience. The trustee is responsible for investing, managing and spending money wisely, as well as filing income tax returns. Trustees may need to take time off work to fulfill these obligations.
• Fees. Family members might waive fees, but when some find out being a trustee is more work than they’ve imagined, they might reconsider. Unless a fee agreement has been formally documented, compensation is determined either under the B.C. Trustee Act or as set out in the will (an hourly or annual rate). For non-professional trustees, it would typically be 2% to 3% of the capital and income, plus an annual care and management fee of up to 0.4%, based on the size of the assets. The fee could, however, go up to as much as 5%.
• Where the proposed trustee lives. If he or she lives outside Canada, there may be income tax consequences and other filing obligations in the trustee’s home jurisdiction.
• The number of trustees. If more than one, will they be able to work together?
• The asset value. The person may be able to handle $50,000, but $5 million could be outside his capabilities.

Since Jordan has a disability, the B.C. Public Guardian and Trustees Office will review Liz and Mike’s will during probate to determine whether they made an adequate, just and equitable provision for Jordan. If not, the office can bring a court application to seek an order for a greater provision. In our experience, the office considers a number of factors, including the needs of the disabled child, the value of the estate, the relative needs of other dependants and the life expectancy of the child.

The experts

Sadie Wetzel

Associate Counsel, Davis LLP, Vancouver

Ron Malis

Advisor, Independent Financial Concepts Group Ltd., Toronto

Ian Hull

Co-Founder, Hull & Hull LLP, Toronto

Have you considered your estate?

Ron Malis:

A Henson Trust protects and supplements some (not all) provincial disability benefit programs, such as the Ontario Disability Support Program. To be eligible for ODSP, Jordan cannot own more than $5,000 in non-exempt assets, such as cash, stocks and bonds. (Exempt assets include disability-related items like wheelchairs, principal residences and primary vehicles.) Since Jordan can’t control distributions from a Henson Trust, it’s also exempt.

Liz and Mike could put Jordan’s residence into a Henson Trust in case he needs to move into a supported facility—that way, if he later sells the home, any proceeds would remain in the trust. Any income-earning properties or assets could also be placed in the trust.

But Jordan can’t receive more than $6,000 in a rolling 12-month period, including money from the Henson Trust. Any extra affects eligibility for, or the amount from, ODSP.

Fortunately, withdrawals from a Registered Disability Savings Plan don’t affect ODSP eligibility, so I’d advise Liz and Mike to open one of those accounts. RDSPs also allow access to government grants. Further, unlike a Henson Trust, Jordan could control his own funds if he has legal competence.

The lifetime contribution limit for an RDSP is $200,000, which can be topped up with matching government grants of $3,500 yearly, to a lifetime maximum of $70,000. (There are additional grants for low-income families.) If Jordan gains assets in future—say, a $20,000 gift from his grandparents that wasn’t structured to go into the Henson Trust—he could put that gift in the RDSP.

And, if Liz, Mike or Jordan’s grandparents have extra money in RRSPs or RRIFs after they die, that money can roll over to an RDSP tax-free. It wouldn’t qualify for government grant matching, but would count toward the $200,000 limit. Also, Jordan must start withdrawing from his RDSP the year he turns 60. He’ll have to pay income tax on withdrawn grants, investment income and rollover amounts. If he needs money earlier than 60, he might be penalized: for every $1 you take out of the RDSP, the government will take back up to $3 of what it’s contributed—to a maximum of what it contributed in the 10 years prior. If the government contributed nothing, there’s no penalty.

So, if Liz and Mike start now and contribute the maximum amount per year to get government grants, the RDSP will hit $200,000 when Jordan’s in his late 30s. That means he can access the RDSP penalty-free in his late 40s.

If there’s money left in the RDSP when Jordan dies, the government will take back the contributions it made in the past 10 years. The remaining amount will go to his estate.

Outside an RDSP and Henson Trust, without upsetting the ODSP, Jordan could own up to $100,000 in a combination of the inherited value in a trust, the cash value of life insurance and segregated funds (including growth). If he can make his own investment decisions, he could buy after he turns 18, and just before he applies for ODSP.

Ian Hull:

A disability trust is for assets under $100,000 and a Henson Trust is typically for assets above $100,000. These trusts usually draft discretionary power for the trustee to make almost any decision. That’s probably two-thirds of the document. The rest is naming the trustee and giving her the ability to use both capital and income in case she needs to pull out funds.

What you learn

Naming a trustee for a disabled child can make or break the future of that loved one. Whether choosing a family member, a friend, or an institution, clients must pick carefully.

Evelyn Juan is a Toronto-based financial writer.