Henson Trust provides for disabled dependants
YOUR MONEY by Murray Becotte
For many people, part of financial planning is ensuring that they have sufficient financial resources for a comfortable retirement. Families with children who are disabled face additional concerns — the ongoing care and well-being of their children, especially when the parents are no longer able to look after them.
The main challenge in estate planning for the benefit of dependants who are disabled is that leaving assets directly to the dependants may impact their eligibility for income and/or asset-tested government programs. As an example, to qualify for Income Support under the Ontario Disability Support Program (ODSP), the applicant’s financial eligibility is determined by both an income test and an asset test.
For parents who would like to provide an inheritance to a child in their wills, with a view to ensuring the continued financial well-being of that child, the challenge is that an inheritance will normally be regarded as income at the time of receipt and on an ongoing basis as an asset of the recipient.
A strategy adopted since 1986 is the Henson Trust. The Henson Trust is named after Leonard Henson who had a disabled daughter, Audrey, and wanted leave his estate to her benefit. If used properly, a Henson Trust allows parents and others to leave an inheritance to a person with disabilities without reducing or suspending ODSP benefits.
The core of this strategy is to set up an absolute discretionary trust in the will. It is crucial that the language is clear that the income and capital of the trust is to be distributed to the beneficiary only when the trustees decide to do so. The trustees have full control as to when, if and how much income is to be paid to the beneficiary. In other words, the beneficiary has no vested right to income or capital under the trust and cannot demand payment or distribution from the trust.
The logic of this strategy is predicated on the fact that the beneficiary does not own the trust assets. Therefore, those assets will not be counted for the purpose of determining eligibility for governmental programs.
The trustee is under no obligation to distribute the trust property to the beneficiary and the beneficiary, therefore, is only entitled to that part of the trust property that the trustee has chosen to distribute. The beneficiary cannot be said to have any interest in the assets of the trust because the beneficiary does not have access to the assets and cannot compel the trustee to make any sort of payment.
For the assets held in an absolute discretionary trust, only the amounts paid out of the trust to the person with disabilities will be included in that person’s assets and income in determining whether he or she is entitled to the ODSP benefits.
The essence of the Henson trust is to confer absolute discretion to the trustees; so it is important to choose trustees you know will respect your wishes and act in the best interest of the beneficiary. Trustees will require the financial acumen — so the trust funds are properly invested and managed. Since the trust is to continue for the lifetime of the beneficiary, the trustee should be available to act throughout that period. It may be necessary to appoint more than one trustee to ensure continuity.
Siblings of the beneficiary are often appointed as trustees as well as being residual beneficiaries of the trust. This may introduce potential conflicts of interest where the trustees try to retain the funds in the trust rather than expend them for the benefit of the beneficiary. One way to avoid this is the use of corporate trustees.
(Murray Becotte is a chartered accountant and CFP working as an investment advisor with TD Waterhouse in Thunder Bay. Opinions expressed in this column are his. Your Money appears every Monday in the print edition of The Chronicle-Journal.)