Planning Ahead

Financial Security  (Planning Ahead)

While most Canadians are aware that estate planning is important, the benefits of preparing legal documents such as wills, powers of attorney and trusts is often underestimated for those with disabilities and their families.

The way provincial governments control benefits across Canada makes estate planning even more important. Understanding the interaction between government benefits and the laws governing the transfer of property after death (and what impact this will have on your finances) is vitally important to maintaining financial security, as well as protecting assets for individuals with disabilities.

Take the example of Jim, a 40-year-old individual living with multiple sclerosis (MS). Jim receives benefits under the Ontario Disability Support Plan (ODSP). He lives in Ontario with his mother, Janet, who is 79, in a rented apartment.

Janet has a significant nest egg of cash under her mattress. She wishes to leave the money to Jim, but wants to ensure that his ODSP benefits won’t be affected. She and Jim also want to make sure that the assets he collects during his lifetime are secured in the event of his incapacity or death.

Without proper estate planning, Jim’s inheritance may be subject to otherwise unnecessary taxes, and in the event that Jim’s MS advances to the point where he can’t handle his finances, they may be managed by a person who is not aware of his needs or wishes – regardless of what Janet’s or Jim’s intentions might be.

Jim’s ODSP benefits may also be suspended until his assets are reduced to less than $5,000, which is the maximum asset value a single person who receives ODSP may hold, or until he converts his inheritance into an exempt asset, such as a primary residence or a trust (which, if set up outside of the will, may be subject to a $100,000 limit).

Furthermore, unless Jim undertakes some estate planning of his own, in the event of his incapacity, his financial and medical care may be placed in the power of someone other than a trusted friend or family member. Any assets he has at the time of his death will be distributed according to the provincial legislation, regardless of what Jim’s relationships are like and what his intentions might be. His estate might also be subject to unnecessary taxes.

OPTIONS

Wills
At the very least, both Janet and Jim should have wills. A will is a legal document by which a person can distribute his or her belongings after death. A person dying without a will is said to die “intestate,” and his or her assets are then distributed according to the applicable provincial legislation. The legislation pays no attention whatsoever to the wishes of the deceased, and it follows a rigid structure for the division of assets according to legal and blood relationships. In most provinces, if a person dies without a will, his or her estate (all belongings at death) could be subject to substantially higher taxes than if a will had been prepared.

Trusts
Janet should also consider creating a trust for Jim’s benefit, either while she is living or upon her death through her will. A trust is a legal arrangement through which assets are legally held by one individual (a “trustee”) for the benefit of another (a “beneficiary”). The various trust arrangements that are possible, and the legal requirements of each, are beyond the scope of this article. Simply put, by using a trust, Janet could make sure that Jim’s ODSP benefits will remain unaffected when he receives his inheritance.

Powers of Attorney
Janet and Jim should both have a ‘‘power of attorney for property” and a “power of attorney for personal care.” A power of attorney is a legal instrument through which you can designate another person to have the authority to make decisions on your behalf, either with respect to your finances and assets (property), or your medical and care needs (personal care) if you become unable to make those decisions yourself. This would give both Janet and Jim the security of knowing that decisions regarding their personal care and assets will be made by people whom they trust to respect their wishes.

By using all of the above tools, Janet and Jim can enjoy the peace of mind that comes from knowing that their affairs will be handled according to their wishes. Jim’s ODSP benefits can also be preserved, and significant taxes can be avoided.

Registered Disability Savings Plan
In addition to the traditional financial- and estate-planning vehicles described above, the federal government has created a savings vehicle for people with disabilities, the Registered Disability Savings Plan, or RDSP.

The RDSP allows individuals with disabilities to grow money in a tax-deferred manner, similar to that of a registered education savings plan. Anybody can contribute to an individual’s RDSP, including family members, friends and colleagues.

The treatment of the RDSP as an asset, as well as the treatment of income from an RDSP, has yet to be considered by most provincial income-support programs.

British Columbia and Newfoundland have already taken the lead by declaring that RDSPs will be treated as an exempt asset under their disability benefits legislation, as will income that is generated from an RDSP.

Disability-support programs, such as the ODSP mentioned in the example of Janet and Jim, are considering whether or not they will follow the commendable example set by these two provinces.

The implication of the RDSP for people with disabilities in British Columbia and Newfoundland is that they can have significant monetary assets in their own name and under their own control without jeopardizing their government benefits.

With the introduction of the RDSP, individuals with disabilities and their families may want to consider revising their estate and financial plans. The combination of the RDSP with existing estate-planning tools, such as wills, trusts and powers of attorney, will allow individuals with disabilities and their families to lead more financially secure lives, while ensuring that their assets are handled: 1) according to their wishes in the event of incapacity or death; 2) so as to preserve government benefits; and 3) in a manner that minimizes their tax liability.

This article is not a legal opinion and your legal rights, options and restrictions will depend on your jurisdiction and your particular circumstances. It is recommended that you contact a lawyer to explore what estate- or financial-planning vehicles would best meet your needs.

Brendon D. Pooran is a sole practitioner in Toronto who practises in association with bakerlaw. He is on the board of directors of the Canadian Abilities Foundation. He can be reached by email at bpooran@pooranlaw.com.