Planning for the Future

By Kenneth C. Pope

A Henson trust, which makes it possible for a person on provincial disability benefits to inherit an estate without losing benefits, just got a lot better.

But before telling you about the improvement, let’s back up and review what a Henson trust is.

Leonard Henson left his estate in trust for his daughter, Audrey, who was receiving disability benefits in Ontario. The province tried to cut off her benefits, but in 1989, the Ontario Court of Appeal ruled in her favor.

The precedent was set. Henson had left the estate in a trust over which Audrey had no control. The estate was in the hands of a trustee with absolute discretion as to its use, and Audrey had no legal vested interest in the trust. Those provisions were key.

The use of a Henson trust is an advantageous way of insuring that an adult child receiving benefits can have something extra, to supplement the sparse standard of living that social assistance provides. Parents ordinarily assist their offspring with the little extras while they are able, but the Henson trust makes it possible to continue this help beyond the grave.

While we are inclined to think of trusts as instruments used only by the wealthy, they can in fact be used to assist families of relatively modest means. Many, if not most, families will find the cost of setting up a Henson trust to be within their means. However, the assistance of someone with expertise is essential, as the wording of the will setting up the trust is crucial in order to avoid disallowance.

So what, then, is the new wrinkle that makes the Henson even better?

The federal government is about to adopt a new provision in the tax system making it possible to roll over an RRSP or RRIF into a Henson trust. As a consequence, none of the money in the RRSP or RRIF will be lost to taxation in the process.

If you already have a Henson trust in your will, you may want to revise it to take advantage of the new situation and to arrange for the roll-over of your RRSP or RRIF.

Let’s take an example to look at the savings that can occur with the roll-over. Bill Carpenter earns $38,000 a year. On New Year’s Eve, he dies suddenly of a heart attack at age 60. He has a son who has significant rheumatoid arthritis and receives provincial disability benefits. There is an RRSP worth $100,000.

With a Henson trust, there is no tax on the $100,000. However, before this change in the tax system, or if the RRSP was not rolled over into the trust, here’s what would have happened. (While tax rates vary somewhat from province to province, they do not vary significantly, so we will use rough Ontario figures here for the sake of simplicity.) On the $38,000 he earned, the estate would be taxed at 22%. On the first $21,000 of the estate, the tax, at 33%, is $7,000. For the next $38,000, the rate is 44%, or some $17,000. Of the remaining $41,000, half is taken by taxes, with the total take by government from the RRSP, some $44,000. The Henson trust avoids that steep loss to taxes.

If the higher earner in the family dies first and his or her spouse has a satisfactory pension and no real need for the spousal RRSP, it may be advantageous to leave the RRSP to a Henson trust rather than to the surviving spouse, for tax purposes. The inheritance could otherwise put the surviving spouse in a higher tax bracket. The surviving spouse would likely be the initial trustee of the trust funded by the RRSP of the spouse who predeceased.

(All teachers and OMERS and other municipal and provincial government pensioners may wish to check their pension plan. Many have pensions that go first to their spouse and then provide for a “dependent survivor” pension, which includes their dependant adult child receiving provincial disability benefits. This may well have a negative effect on the child’s disability benefits and should be taken into account for estate planning purposes.)

With the assets, the trustee can purchase an annuity solely for the benefit of the person with a disability. The annuity could be designed to continue providing income up to age 90, or to some lower age, and the trust would pay tax on the benefits from the annuity at the rate of 22% for up to $38,000 a year. The monthly payout on an annuity will vary with changes in the interest rate, but a 20-year annuity on $100,000 should yield well in excess of $600 a month.

Using the RRSP or RRIF in the way described here requires some careful planning, as the whole instrument must be rolled over into the trust. It is an all-or-nothing affair.

But suppose a person has other children to whom he wants to leave something?

The solution may be to have more than one RRSP or RRIF. That way, one or more of them can be rolled over while still leaving other resources to distribute in the will. Suppose that there are two children, one receiving provincial disability benefits and the other not. There is a house worth $200,000 and an RRSP of equal value. Before the new provision in the tax system, the typical estate-planning approach might be to leave everything to the surviving spouse and then to the two children equally. With the upcoming change, it may well be desirable to reconsider. The RRSP might well be rolled over to the child with a disability, with the resulting tax savings. The house could be left first to the surviving spouse and then to the other child.

An additional thought on estate planning: It may make sense to leave the trust in place for any grandchildren, as there are disabilities that are inherited, some of which show up only in the late teens or early adulthood.

The federal government’s acceptance of the roll-over of RRSPs and RRIFs into Henson trusts is a clear recognition of their legitimacy, but while settled law in Ontario, their status is not necessarily adjudicated in all other jurisdictions.

Where Henson trusts have not been established, disability advocacy organizations should take the lead in monitoring and testing their validity. Generally speaking, this kind of trust should be a valid way of providing assistance to persons in receipt of disability benefits in all common law jurisdictions – that is, in all of Canada outside Quebec. The principle is rather simple: If a person has no control over the assets, then that person cannot be held to be in possession of them.

In the case of Quebec, where civil law based on the Code Napoléon is the system in force, I ordinarily set up a Henson trust with an escape clause: Should the trust be found to be incapable of accomplishing its purpose, then the assets will go to a third party. That third party (say, a brother or sister) would have the moral obligation to use the assets in the interests of the person with a disability. Of course, that eventuality would be discussed beforehand with those concerned.

None of us likes to think about death, but it is a fact of life for all of us. If we are parents of sons or daughters with disabilities, we need to include their welfare in future planning. In that planning for the future, parents should give consideration to including a Henson trust in their wills.

(Kenneth C. Pope is an Ottawa-based lawyer with a practice throughout Ontario and Quebec. He can be reached at (613) 567-8230 or 1-866-536-7673; e-mail: kenneth.pope@on.aibn.com; website: www.kpopelaw.ca.)