My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, October 10, 2016

Estate Planning for Disabled Beneficiaries – Henson Trusts

I have received several requests to write about tax and estate planning for disabled individuals. Thus, this week I have enlisted the help of Katy Basi, my resident wills and estate planning contributor, to write about Henson  trusts, an estate planning opportunity for disabled beneficiaries. Next week Howard Kazdan, a tax specialist with BDO Canada LLP, will write about Registered Disability Savings Plans ("RDSP's").

As Henson trusts are complex, I appreciate Katy providing a detailed analysis of the important issues to be considered in whether or not to use such a trust. So without further ado, here is Katy.

Estate Planning for Disabled Beneficiaries - Henson Trusts

By Katy Basi

It is fairly common for a client to come to me and say "my child has a disability and I've been told I need a Henson trust in my will - whatever that is...." My usual answer is "maybe - let's discuss your situation" - typical lawyer-speak but true nonetheless!

What is a Henson Trust


A Henson trust is a trust created in a will, or by way of a free-standing trust deed, which is completely discretionary and has a disabled beneficiary who is not also a trustee of the trust. “Completely discretionary” means that the trustee will have all decision making power with respect to the timing and amount of all payments made out of the trust. The benefit of having a Henson trust is that the disabled beneficiary’s interest in the trust is not considered to be an asset for purposes of the rules surrounding disability benefits in Ontario and in some other provinces (the “asset test”, in particular, limits the value of assets a recipient of disability benefits may own – further discussed below).

The term “Henson trust”, while common, does not have legal meaning in and of itself, but is generally taken to mean a trust having the attributes set out in the above paragraph. These trusts are called “Henson trusts” due to a court case in Ontario involving a father (last name being Henson) who established a trust of this nature for his disabled daughter. Her right to claim disability benefits was challenged (the government’s position was that her beneficial interest in the trust was a valuable enough asset to disqualify her). The Hensons won the case, based on their position that the beneficial interest in the trust did not have any value due to the discretionary nature of the trust. As the trustee could choose not to pay any of the trust funds to or for the benefit of the daughter, the beneficial interest was held not to have value for purposes of the disability benefit rules.

Planning Using a Henson Trust


In order to ascertain whether a Henson trust is appropriate planning for a client, I will usually ask about the nature of the disability, as this may impact:

  • the child's ability to eventually make capacitated financial and or health care decisions for him or herself,
  • their prospects of getting married and having children,
  • their life expectancy,
  • their ability to be financially independent,
  • their care requirements at various life stages, and
  • other factors that are relevant to their parent’s estate plan.

I will ensure that my client has investigated whether the disability tax credit (“DTC”) is available in relation to their child. We then discuss whether the child is likely to start claiming provincial disability benefits when they attain age 18, as the value placed on the availability of disability benefits varies greatly from parent to parent and affects whether Henson trust planning is appropriate.

Some disabled beneficiaries have good employment prospects, now or in the future, in which case disability benefits are really not relevant. When a disability does not affect the financial acumen of a beneficiary, and they are a relatively high functioning adult, the beneficiary may even receive an outright inheritance (i.e. not in any form of a trust, Henson or otherwise).

Some parents have a large estate, and want their child to have more access to their inheritance than would be permitted by Henson trust planning. These clients find the rules surrounding disability benefits very limiting and essentially assume that their child will not apply for benefits, which in turn makes other estate planning options available.

If disability benefits are important, then we discuss whether the child should inherit by way of a Henson trust set out in the parent’s will. Unfortunately, inheritances received in any way other than a Henson trust usually result in the recipient being cut off from disability benefits (for having access to assets valued at greater than $5,000 (the “asset test”)).

A Henson trust is, by necessity, limiting. As noted above, in order to have the Henson trust assets excluded from the asset test, the Henson trust must be drafted as a fully discretionary trust and the beneficiary cannot be the trustee. Essentially, the beneficiary cannot have the right to demand trust assets at any time, but must rely on the good judgment of the trustee. I have had a few clients decide against Henson trust planning for this reason alone.

When a Henson trust is a good choice, the selection of the trustee, and alternate trustees, is very important given their broad powers. The trustee has the fairly onerous task of managing the trust funds to optimize the quality of life of the disabled beneficiary, without cutting them off from disability benefits – like walking on a tightrope, with significantly more reading and longer telephone calls to the government.

Also, a beneficiary in addition to the disabled beneficiary is usually named in the Henson trust in the event that the trust lasts longer than 21 years. (After 21 years, all trust income must be distributed by an Ontario trust to or for the benefit of a beneficiary. Without an alternate beneficiary, this rule could force a trustee to allocate income to a disabled beneficiary, and disability benefits could potentially be lost.) Sometimes the alternate beneficiary is a charity, and sometimes a family member such as a sibling.

When, as commonly happens, a sibling is both the trustee and alternate beneficiary, there can be a conflict of interest, and the parent needs to be very sure that the sibling will “do the right thing” and not profit personally from the Henson trust unless absolutely necessary. In addition, Henson trusts are often drafted to last for the lifetime of the disabled beneficiary unless the trustee decides to wind up the trust early. (In the latter case, common planning is to require the trust funds to be paid to the disabled beneficiary, which may, or may not, be appropriate under the circumstances.)

Upon the death of the disabled beneficiary, there is often a distribution of remaining Henson trust funds to the siblings of the beneficiary. If a sibling is also the trustee, we can have a conflict of interest, as minimizing distributions for the benefit of the disabled beneficiary during their lifetime maximizes the funds potentially received by the sibling/trustee upon the death of the beneficiary. Obviously, the trustee must be a very trustworthy, morally upstanding sibling!

We also generally ensure that the Henson trust terms specifically permit the trustee to make contributions to a Registered Disability Savings Plan (“RDSP”) set up for the disabled beneficiary in order to optimize the payment of government grants and bonds. We usually advise that the trustee exercise some caution here, as any funds left in the RDSP upon the death of the disabled beneficiary flow in accordance with the disabled beneficiary’s will (or the law of intestacy if there is no will). This may, or may not, be the result desired by my client…

Finally, as of 2016 it will be helpful, from an income tax perspective, if a Henson trust meets the “qualified disability trust” (“QDT”) definition. QDTs are one of the few remaining trusts able to access the graduated rates of tax on income. (All trusts other than QDTs and graduated rate estates pay tax at the highest rate). For a Henson trust to qualify as a QDT, the disabled beneficiary must receive the DTC and elect with the trustee that the Henson trust is their one and only QDT. One issue (yet to be resolved) is that a recovery tax is applicable if anyone other than the disabled beneficiary receives capital from the trust. As noted above, this can easily happen upon the death of the disabled beneficiary. Another issue is that many disabled beneficiaries are not sufficiently mentally capacitated to sign the QDT election form for themselves, and have no court-appointed guardian to sign the election form for them. (Contrary to common belief, parents are not automatically the guardians of an incapacitated adult beneficiary, at law). To ensure QDT status, it may be necessary to apply to the court for a formal appointment of a guardian for the incapacitated beneficiary – which is, of course, costly and time consuming.

The good news is that careful estate planning can ensure that disabled beneficiaries are well cared for their entire lives, even after their parents are deceased, giving peace of mind to the entire family.

Please note that as I am licensed to practice law in Ontario only, this post is based on Ontario law. If you live outside of Ontario, it is strongly recommended that you consult with an estates lawyer licensed to practice in your province – the member directory of the Society of Trust and Estate Practitioners (“STEP”) at step.org is a good place to begin.

Katy has written numerous popular estate planning posts for this blog over the years including Estate Planning for Blended Families, Qualifying Spousal Trusts - What are They and Why do we Care? and a three part series on new will provisions for the 21st century dealing with your digital life, RESPs and reproductive assets, the family cottage and a very well received post titled, An Estate Fairy Tale.

Katy Basi is a barrister and solicitor with her own practice, focusing on wills, trusts, estates and income tax law (including incorporations and corporate restructurings). Katy practiced income tax law for many years with a large Toronto law firm, and therefore considers the income tax and probate tax implications of her clients' decisions. Please feel free to contact her directly at (905) 237-9299, or by email at katy@basilaw.com. More articles by Katy can be found at her website, basilaw.com. 

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. 

2 comments:

  1. Mark, for folks who have older disabled loved ones, the Henson Trust is the best way to go. My parents have set one up for my older brother , thank you for putting this important article up. Your good works are very much appreciated.

    ReplyDelete