When planning for the financial security of a family member with a disability, it is important to take into account his or her unique circumstances and needs. Available planning options sometimes place a large emphasis on ensuring that income support under the Ontario Disability Support Program (ODSP) is not jeopardized. Where there are more than adequate financial resources to support a disabled family member, reliance on ODSP with its attendant restrictions may be unnecessary or even undesirable. Common planning options for persons with disabilities include Henson trusts, inheritance trusts, and Registered Disability Savings Plans (RDSP).
Henson Trusts and Inheritance Trusts
Henson trusts are used to provide additional financial support to persons who rely on ODSP. A properly structured Henson trust should not jeopardize a person’s entitlement to income support under the ODSP. A Henson trust is a fully discretionary trust under which the trustees have complete discretion to determine whether to pay any income or capital to a beneficiary. Henson trusts are established for the primary benefit of persons who rely on ODSP, but other family members are often included as beneficiaries as well.
An inheritance trust is a trust established by will for the maintenance of a person with a disability. Its total assets must not exceed $100,000. Under the ODSP, an inheritance trust is an exempt asset and does not affect a beneficiary’s entitlement to income support. In contrast to a Henson trust, an inheritance trust does not have to be fully discretionary.
Even where a person does not rely on ODSP, a trust may still be appropriate. Trusts established by will, including Henson trusts and inheritance trusts, offer attractive tax benefits because they are treated as separate taxpayers and currently have their own graduated rates of income. As a result, it is possible to split income between the trust and the beneficiary, which should result in an overall tax savings.
However, the government has released draft legislation which will, if enacted, eliminate the above tax benefit starting in 2016, except where the beneficiaries of the trust are eligible for the disability tax credit. Unfortunately, the narrowness of that exception makes it problematic to use a discretionary trust to accumulate income for persons who face mental and physical challenges, but who do not qualify for the disability tax credit. In those circumstances, trustees are faced with the difficult decision of whether to accumulate the income and be taxed at the highest marginal tax rate or distribute the income to the beneficiary who may be taxed a lower marginal tax rate, but who should not be put in control of the income; for example, a beneficiary that suffers from substance abuse.
The government has not yet released any further details regarding the parameters of the exception. There is a potential concern that they may be too narrow and may disrupt Henson trust planning if all of the income beneficiaries of the trust must be eligible for the disability tax credit. Under a Henson trust, the trustees may accumulate income for a maximum of 21 years. Income arising after the expiry of that period must be paid out by law. Payment of that income to a beneficiary who relies on ODSP could jeopardize his or her entitlement. To protect against that concern, a Henson trust provides that such income must be paid to other beneficiaries, such as other family members. As a result, it may be necessary to determine from the outset whether to forgo either the tax benefit or income support under the ODSP.
As well, other family members are often included as beneficiaries of Henson trusts and other testamentary trusts because they tend to generate more than adequate income to support the family member with a disability. If other family members cannot be beneficiaries, higher overall tax may be payable since it will no longer be possible to split income of the trust among various beneficiaries that would be taxed on that income at their own marginal tax rates. Instead, most or all of the income of the trust will have to be taxed in the hands of a single taxpayer, the trust.
Registered Disability Savings Plan
An RDSP is a tax-assisted savings plan. A person eligible for the disability tax credit must be designated as the beneficiary of the RDSP. A maximum of $200,000 may be contributed to an RDSP and income-tested government assistance may be available to match or enhance contributions to the plan. For purposes of ODSP, RDSPs are exempt assets and payments are considered exempt income.
The above planning tools may not be appropriate or necessary in all circumstances. Each individual situation must be considered in order to formulate a reasonable plan in the best interests of the family member with a disability. For more information on Henson trusts, inheritance trusts, and RDSPs, please see our Advisory titled “Estate Planning to Benefit Family Members With Special Needs”.
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The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.