Plan for family members with special needs

Clients with disabled family members often provide for their care in estate plans. To work, these plans should address the following criteria about those members:

• age (and guardianship, if younger than the age of majority)
• type and extent of disability
• capacity to make decisions about property and personal care
• employability and financial self-sufficiency
• reliance (or future reliance, if the family member is a child) on government support like the Ontario Disability Support Program (ODSP)

Here are three ways to provide for family members.

• Henson trusts

  Leaving assets directly to a disabled family member may disqualify her from ODSP. Instead, consider discretionary Henson trusts: they may permit payments (as described below) without jeopardizing the ODSP entitlement.

  Conditions for a qualifying Henson trust are strict:

  • The trustee must have full discretion over whether to pay income or capital to the family member; and
  • The disabled family member cannot have any vested right to receive income or capital from the trust.

  Warning

  ODSP may consider a henson trust an asset if it’s not structured properly

  Henson trusts can be set up during a client’s lifetime or under a will. If structured properly, ODSP will not consider the trust to be an asset (regardless of its value) because the family member isn’t legally entitled to force distributions from the trust. The trust is usually worded so that once the trustee decides to make a payment, it must go to the family member or be used for her benefit. The trustee also needs to follow the ODSP rules when making any trust payments to the family member to ensure ongoing entitlement. For example, the family member can only receive a maximum of $6,000 in any 12-month period from gifts or voluntary payments (other than for disability-related items, services, training or education).

• Registered Disability Savings Plans (RDSPs)

  If the family member qualifies for the federal disability tax credit, she may also be able to benefit from an RDSP. If she’s a minor, a parent or guardian can open and manage the RDSP.

  If she’s a capable adult, she’ll usually be the planholder. But if she’s not, a legal guardian will need to be the holder. If there’s no guardian, a spouse, common-law partner or parent may be a planholder until 2016. Anyone can contribute to an RDSP as long as the holder gives written consent. The lifetime contribution maximum for any beneficiary is $200,000, and the government may also match or enhance contributions.

  The year the beneficiary turns 60, she must withdraw RDSP income annually up to a set yearly maximum, in addition to some other restrictions. Lump sum payments may be made any time, subject to similar restrictions.

  While contributions aren’t tax-deductible, investment income earned in the plan is tax-free and payouts are partially taxable. Also, a parent or grandparent of a financially dependant child or grandchild who qualifies for an RDSP may roll over funds on death from certain registered plans, such as RRSPs and RRIFs, into an RDSP for the child or grandchild. This rollover does not apply to TFSAs.

  RDSP payments don’t count as income for ODSP purposes, provided the contributions comply with the $200,000 maximum lifetime contribution threshold.

• Letters of wishes

  While often not legally binding, a letter may help communicate your client’s goals and set guidelines for a trustee or guardian. That can be important if the trustee or guardian has broad legal powers.

In Alberta, the disability income support program is called Assured Income for the Severely Handicapped. In B.C., it’s called Employment & Assistance for Persons with Disabilities.