Henson Trusts provides families with disabled children with a powerful savings tool. Ensuring a disabled child or family member receives lifelong support is an important consideration. Not only must support last for 40 or 50 years but there are also significant tax implications. Victoria BC wills and estates lawyer John Jordan discusses one financial planning tool for families living with a disability, a “Henson Trust.”
What is a Henson Trust?
Henson Trusts are trusts which can be set up during a person’s lifetime or in his or her Will. The Trust gives the Trustee complete control or absolute discretion over how much and when to pay the named beneficiary or beneficiaries. Henson Trusts derive their name from an Ontario Court of Appeal decision in the 1980’s.
Henson trusts are a tax efficient way for parents to provide financial support for their children who live with a disability.
Essentially in BC, like Ontario, assets held in the Trust are not considered the disabled person’s assets. This is because the Trustee makes decisions about how to spend the Trust’s income. As a result, the government cannot consider the assets in a Henson trust when it does an asset “means test”. This is to decide if the disabled beneficiary is eligible for benefits under the British Columbia Employment and Assistance for Persons with Disabilities Benefits Act.
Henson trusts do not require a minimum amount of assets and can hold an unlimited value. The family home can also be “left behind” in a discretionary trust for the disabled beneficiary.
How can this savings tool help families living with children who have disabilities?
On both Ontario and British Columbia, the Trustee can spend respectively up to $5000 and $8000 in any month period for payments to enhance the disabled beneficiary’s “independence” without losing the disabled beneficiary’s provincial government disability benefits.
If the Trustee provides for it, the Trustee can pay both the capital and the income in a Henson trust.
Henson trusts can also minimize the “tax bite” on income generated by the Trust assets. If the disabled beneficiary qualifies and registers for the Federal disability tax credit, the Trustee can use the “Preferred Beneficiary Election” (Section 104 (14) Income Tax Act of Canada) to split income and so attribute trust income to the disabled beneficiary who is taxed at a low marginal rate of income tax, even if the disabled beneficiary does not actually receive all or part of the income.
The advantage is that the Trust’s income would be taxed at the low rate of tax of the disabled beneficiary. The result is that no income tax is paid on the Trust’s annual income because the disabled beneficiary would use his or her personal income tax exemption and other personal tax credits to offset the taxable income attributed to them from the Trust, even if the income was not actually paid to him or her.
Funding a Trust
There are a variety of resources within the reach of most families which can be used to fund the trust:
- Savings
- Parent’s Estate
- Family Members
- Life Insurance
It’s advantageous to use a combination of tools to help those with special needs. RDSPs and Henson Trusts can be used with insurance and segregated funds to help build a solid financial plan.
