Disability Planning Primer – Henson Trust’s and RDSP’s
Estate planning is essential for those of all ages to ensure the interests of a spouse, child, and other loved ones are reflected. For individuals creating an estate plan, especially for those considering beneficiaries with disabilities, this process can be even more complex.
The general goal for disability planning is to create resources for those with disabilities now and in the future, while still maintaining eligibility for disability assistance.
The ministry requires those with disabilities to keep their assets under a certain amount, in order to remain eligible for disability assistance. For example, if an individual with a disability has the “Persons with Disabilities (PWD)” designation, then they have a general asset exemption of $100,000, meaning that above that amount, their disability benefits will be reduced or eliminated.
Therefore, an inheritance may put a beneficiary with disabilities beyond that threshold, thus reducing or eliminating that person’s entitlement to disability assistance.
Fortunately, there are disability and estate planning tools available to ensure that individuals with disabilities remain entitled to benefits. BC Employment and Assistance legislation provides that a person receiving disability assistance can have assets held in certain trusts, without those assets affecting eligibility for assistance. Payments from these trusts are considered exempt income for those with the “Persons with Disabilities” designation, as well as certain other recipients; therefore, the ministry does not limit the amount of money that can be paid out of these trusts to a beneficiary.
What is a Trust?
A trust is a legal relationship where someone, as the “trustee”, holds the legal interest in money or other assets for someone else’s benefit, the “beneficiary”. The legal relationship is typically set out in a written agreement or in a will.
There are two types of trusts: non-discretionary and discretionary trusts.
A non-discretionary trust is a trust in which the trustee does not have absolute authority over how money is paid out. Instead, the beneficiary may have some control, or the trustee may be required to make certain payments. A non-discretionary trust is considered an asset by the ministry, however, it will be considered an exempt asset as long as the amount of money contributed to the trust does not exceed $200,000.
On the other hand, a discretionary trust is a trust in which the trustee has absolute authority over how money is paid out. Therefore, the beneficiary has no control over the money held in trust. Unlike non-discretionary trusts, a purely discretionary trust exceeding $200,000 is an exempt asset and does not create an eligibility concern for disability assistance. For this reason, discretionary trusts, commonly referred to as Henson trusts, are a popular disability planning tool.
What is a Henson Trust?
A Henson trust is a type of discretionary trust, comprised of three essential elements:
- the trustee must have absolute discretion to make distributions of income and capital to or for the benefit of the beneficiary;
- the assets of the trust do not vest in the beneficiary; therefore, the beneficiary cannot claim or demand payments from the trust and they do not, as a result, own the contents of the trust; and
- there is a “gift over”, or a direction to the trustee as to what is to be done with the remaining trust property after the beneficiary with disability dies.
As long as these three, essential elements are present, and the trust is properly constructed, a Henson trust can be set up on a testamentary (established by a deceased person) or inter vivos (established by a living person) basis, while ensuring the beneficiary’s entitlement to disability benefits is maintained.
A popular method of implementing a Henson trust in an estate plan is through a will. Commonly, parents who have a child with a disability create wills incorporating a Henson trust. The Henson trust exists for the child’s lifetime, ensuring that the child can receive an inheritance without affecting any entitlement to disability assistance.
However, Henson trusts are not the only effective disability planning tool, as a registered disability savings plan (“RDSP”) can also be used, even in conjunction with a Henson trust.
What is an RDSP?
An RDSP is a savings plan intended to help parents and others save for the long term financial security of a person with disabilities.
An individual can be designated as a beneficiary on an RDSP, provided the person: is eligible for the DTC (disability tax credit), has a valid social insurance number, is a resident of Canada when the plan is entered into, and is under the age of 60 (a plan can be opened for an individual until the end of the year in which they turn 59).
There is no annual limit on amounts that can be contributed to an RDSP of a particular beneficiary; however, the overall lifetime limit for a particular beneficiary is $200,000. All previous contributions and rollovers that have been made to an RDSP of a particular beneficiary will reduce this amount. Contributions are permitted until the end of the year in which the beneficiary turns 59.
How is an RDSP set up?
To open an RDSP, a person who qualifies to be a holder of the plan must contact a participating financial institution that offers RDSPs. These financial institutions are known as RDSP issuers.
The plan holder is the person who opens the RDSP and makes or authorizes contributions on behalf of the beneficiary. Who qualifies to be a holder is dependent on the age of the beneficiary and the beneficiary’s contractual competence. Therefore, it is possible for a person with disabilities to open an RDSP for themselves, as long as they meet certain requirements.
Withdrawing from RDSP?
There are three types of payments, which can be made from an RDSP:
- disability assistance payments (“DAPs”) (including lifetime disability assistance payments -“LDAPs”); A DAP is a one-time payment, which can be requested at any time, to the beneficiary or to the beneficiary’s estate after their death; whereas, LDAPs must be paid annually to the beneficiary until either the plan is terminated or the beneficiary dies. LDAPs must begin by the end of the year in which the beneficiary turns 60, and are also typically subject to an annual withdrawal limit.
- direct transfers to another RDSP for the same beneficiary; or
- repayments under the Canada Disability Savings Act (CDSA) or designated provincial program.
It is important to note that there are repayment requirements which may affect how funds are held in an RDSP, including the amount and how often funds can be withdrawn from the RDSP.
A “10-Year Repayment Rule” applies to RDSP’s whereby all government grants and bonds that have been paid into the plan during the preceding 10 years before the event must be repaid to the Government of Canada, but only upon the termination of the RDSP, the RDSP being deregistered, or if the beneficiary dies.
To ensure there are enough funds in the RDSP, issuers (the financial institutions) are required to set aside an “assistance holdback amount” equal to the total amount of grants and bonds paid into the RDSP by the government in the preceding 10 years, less any amount of grants and bonds that have already been repaid. The amount of grants and bonds contributed by the government to the RDSP is dependent on the beneficiary’s family income and the amount contributed to the RDSP.
The “proportional repayment rule” applies to withdrawals made from an RDSP after 2013. This rule requires that for each $1 withdrawn from an RDSP, $3 of any grants or bonds paid into the plan in the 10 years preceding the withdrawal be repaid, up to a maximum of the “assistance holdback amount”.
Additionally, there may be tax implications. The CRA notes that proceeds from rollover amounts, as well as the grants, bonds and income earned in the plan are included in the beneficiary’s income for tax purposes when they are paid out of the RDSP.
How We Can Help
The information in this post is general in nature and does not necessarily apply to your specific estate planning situation. If you require any legal advice regarding your estate planning, please contact Bell Alliance LLP at 604-873-8723 or email us at firstname.lastname@example.org.