What is a Henson trust?

A Henson trust is a testamentary (i.e. set up by your Will) trust that is used to hold the inheritance of a handicapped person. They are used in a very specific way.

A person who is severely mentally or physically handicapped to the point where he or she cannot earn a living is entitled to provincial or territorial government benefits. These benefits include a monthly sum of money for payment of accommodation and other expenses, as well as access to free or subsidized medical, dental, optical and other services. The handicapped person's family want to ensure that these benefits keep flowing to the handicapped person.

A person who receives these provincial and territorial benefits may be cut off from the benefits if they have a certain amount of assets or income. This rule is put into place to ensure that the benefits are paid to people who really need them. In Alberta, as an example, a person receiving benefits is entitled to own no more than $100,000 in assets, as well as a home and a car before the benefits are clawed back. This is known as an asset test, and the benefits program also has a means test that looks at how much income the handicapped person receives in income. If there is more than a certain amount of income, the government benefit will be reduced dollar for dollar.

This is where estate planning comes into the picture. When the parents of a handicapped person are making Wills, they have to decide how much of their estates they are going to leave to the handicapped child. If they leave too little, they run the risk that the child will not be adequately and comfortably provided for. There is also a risk that the Public Trustee could contest the Will on behalf of the handicapped child to get a greater share of the estate given to the child.

If the parents leave too much to the child, they risk cutting the child off from government benefits. Many parents tell me that the value of the medical, dental and optical benefits is very great and would drain a $100,000 trust long before the child passed away.

The solution hit upon by estate planners is to hold a share of the parents' estate in trust. It could be the whole estate or a share of it. The wording and set-up of the trust are crucial. If you simply take the handicapped child's share of the trust and leave it in a regular testamentary trust for that child and nobody else, with payments going to the child and nobody else, that money has clearly been left to the child and will be deemed as an asset of that child.

A Henson trust is set up differently. The trust is held in the name of the handicapped child as well as other people, usually the child's siblings and possibly nieces and nephews. Payments out of the trust are fully discretionary, meaning that payments are made as the trustee of the trust decides. Payments might be made to the handicapped child, or they might not, but the child has no right to demand any money be paid to him or her. Payments might also be made to the other siblings or nieces or nephews as the trustee decides. Therefore it can't be determined that any or all of the money really belongs to the handicapped child.

Henson trusts are completely legal and above board. They are effective in every province and territory in Canada, except for Alberta.

If you are interested in knowing more about whether a Henson trust would be a good idea for your family, find an experienced estate planning lawyer and talk it over.