How to leave an inheritance to someone on ODSP

Regular readers of this blog know that I especially love finding articles by knowledgeable people that are readable and straightforward, because I can share them with you and know that you're getting some valuable information. I have found one such article - click here to read it - from Ottawa lawyer Donna Neff.

In this article, Ms. Neff gives some practical information about how to leave an inheritance to someone who is, or in the future likely will be, receiving Ontario provincial benefits due to a disability. The issue there is generally how to leave an inheritance without causing the beneficiary to be cut off from valuable provincial benefits. Obviously you would want to leave an inheritance to better someone's life, not to cause difficulties.

Although this article is specifically about Ontario, all provinces have similar benefits and family members across Canada wonder about leaving inheritances to children and grandchildren with disabilities without messing up their benefits. In all provinces but Alberta, the Henson trust discussed by Ms. Neff is an option to be considered.

I highly recommend this article to anyone who has a disabled beneficiary in his or her life.

Seminar for parents on RDSPs and Henson trusts

I received this note on LinkedIn, and it looks like a fantastic opportunity for the parents of a disabled child (of any age) in Ontario to get some great information. Here is the note I received:

"Presentation next week on RDSPs & Henson Trusts. February 6th at 6pm at the Living Arts Centre in Mississauga. RSVP or more info 905-896-8373. Know a parent with a disabled child? Forward this information to them. They will learn about all the government funding available and how to put their minds at ease to support their children."

The note was posted by Jennifer Black, Wealth Manager at Dedicated Financial Solutions. I don't know Ms. Black so I can't vouch for her personally, but if she works within the financial industry she should be a great source of information about these topics. I'd appreciate any feedback from anyone who attends this seminar.

For those who may not know, a Henson Trust is a specialized trust set up in the wills of parents with a disabled child. The purpose of the trust is to ensure that the disabled child does not lose provincial support benefits because of the inheritance.

Tips for giving inheritances to disabled children

A challenging aspect of estate planning is that of leaving an inheritance to a disabled child. A big part of the challenge is leaving the child a decent sum of money and maximizing the inheritance without interfering with valuable government benefits. I've just found an excellent article from http://www.advisor.ca/ that talks about many aspects of estate planning for a disabled child. It's very thorough, but readable. I recommend this article to anyone whose family includes a disabled child of any age. Click here to read it.

Home-made estate planning can be dangerous

Last week I met with a widowed woman to talk about estate planning. Let's call her Mrs. Jones. She was anxious to tell me that what she really cares about is making provision for her disabled son. He is in his 50s, lives with his mother, and is unable to handle finances without help. Mrs. Jones is worrying about what all parents of disabled children worry about - what will happen to the child when the parent is no longer here to look after him. Her primary goal in doing her estate planning was to make sure that he was cared for.

This was a good start. Mrs. Jones told me that she owned her home and some non-registered savings, enough to set up a trust for her son's lifetime and still give an equal share to her other child, her daughter.

Then I discovered the problem that would make Mrs. Jones' plans impossible.

She had already given all of her assets to her daughter years ago. Her home had been transferred, though she still lived in it. Her non-registered investments had all been transferred. This wasn't even a transfer into joint ownership; it was an outright gift. Mrs. Jones owned nothing but her personal possessions and her RRIF (only because a RRIF can't be owned by anyone else), which names her daughter as her beneficiary.

Mrs. Jones said she wants to make a will and set up a trust for her son. She wants him to be able to live in their house as long as he wants. I replied that she doesn't own a house anymore, nor any money to leave for the upkeep and running of a house. It took me a while to make her understand that with her current legal and banking arrangements, she has not a penny to leave to her son.

She was so aghast at this news that I admit I at first suspected coercion on behalf of the daughter, but Mrs. Jones assured me that she had willingly signed over the assets. She just figured they were still "really" hers and that she could still do what she wanted with them. She hadn't realized she'd transferred ownership. She couldn't really explain why she had taken these steps, other than it felt pro-active to do "something" with the house and she wanted her daughter to be able to help her. Had she simply left it all alone and not transferred it to her daughter, Mrs. Jones could have made the will she wanted.

This is an extreme example of the kind of home-made estate planning moves that people make without legal advice. Without meaning to, Mrs. Jones had set things up so that her primary goal - looking after her disabled son - could not be reached. It was the opposite of what she meant to do. The worst case scenario is that the daughter will sell the house and spend the investment money, leaving no assets at all to support her brother. The best case scenario would involve the daughter voluntarily agreeing to transfer assets back to her mother (we'll have to see what tax implications are involved) or to put assets into a trust for her brother.

If the assets are not in Mrs. Jones' name, she cannot give them away in her will. She can't put them into a trust for her son, nor can she name the trustee to look after the funds. She'll have to rely on her daughter to do the right thing in supporting her mother if RRIF funds are not enough, and to look after her brother.

Call me cynical, but I'd prefer to see Mrs. Jones' son looked after by his mother's will than his sister's good intentions. After all, she could run into financial difficulties, or be sued, or get divorced, any of which could leave her elderly mom and her disabled brother in dire straits.

Home-made estate plans are commonplace of course, but they are dangerous. Many Canadians transfer important assets like their homes, cottages and bank accounts to family members because they intend to avoid probate or get help with the banking. In a dismaying number of cases, they don't think far enough ahead. Before taking major steps such as transferring your home or your life savings to someone else, see a lawyer. Find out what the long-term implications are for you and your family.

Leaving an Inheritance to someone with a disability: Is a Henson Trust the only option?

The basic problem described by parents or other family members who want to leave funds to a disabled beneficiary is how to do so without causing the beneficiary to be cut off from provincial disability benefits. In this article, Donna Neff, a lawyer in Ontario, discusses the pros and cons of the various strategies people use. Ms. Neff refers to ODSP, the Ontario plan, but each province has its own disability benefits plan, and her comments apply to all.

One item I would add is that in Alberta, Henson trusts are not valid. They are valid everywhere else in Canada, to my knowledge.

Click on the link below to read the article:

Leaving an Inheritance to Someone with a Disability: Is a Henson Trust the Only Option?

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.

Have you made legal guardianship arrangements for your disabled child?

When the parents of a disabled child think about estate planning, they of course consider the options open to them for Will planning. We'll get to those in a separate post, but in the meantime, the parents may also need to take some important steps that will take effect while they are still alive.

The first consideration is guardianship. I use this term as separate from trusteeship, or the custodianship of money. A guardian is someone who will look after where the disabled child lives, with whom the child lives, whether the child works on a paid or volunteer basis, and guides the child's daily life challenges such as grooming, transportation, education and entertainment.

Many parents reading the previous paragraph will dismiss it by thinking "we already do that for our child". It's possible that an informal arrangement works just fine for now. But what happens when you pass away? If your child is of the age of majority when you pass away, you can't appoint a guardian in your Will. You can do something about this while you are alive, if you wish to, but you cannot control it through your Will.

What if you should lose your mental capacity due to injury, illness or aging? Who will be making decisions for your child if you are having trouble making decisions for yourself? Would you like to have some input into who is put in charge of your child if you're not able to do it?

While your disabled child is a minor, there is no need for a guardian to be appointed, as the parents are automatically the child's guardians. Once the child reaches adulthood, however, it is a different matter. Adults are, in law, presumed to be competent to handle their own financial and non-financial affairs unless it is proved to a court of law that they are not. Therefore, as a parent, you may not have access to information or any control over decisions for your child once the child reaches the age of majority. This is where adult guardianship comes in.

In many cases, the disabled child doesn't have much in the way of assets while his or her parents are alive. Often the only asset that needs looking after is a monthly government benefit. If this is the case, it can be expensive and time-consuming to appoint a trustee who isn't really needed. However, a guardian to help with non-financial decisions most likely is needed.

In almost all provinces and territories, guardians may be appointed separately from trustees, so you can have a guardian appointed without going to the expense and trouble of having a trustee appointed. If you are the parents of a disabled child, you can both be joint guardians, but be sure to appoint a sibling or friend of the child as an alternate guardian for when both parents have passed away.

Make sure your estate planning includes a review of any and all steps you can take now to set matters up securely for your disabled child's future.

If I open an RDSP for my disabled child, will he/she lose government benefits?

The Registered Disability Savings Plan (RDSP) has been around long enough now that most people involved with disabled adults are aware of the general operating rules. However, I do still get quite a few questions from parents who wonder if they might accidentally cause their children to lose their government disability benefits by creating this kind of account.

Provincial plans pay eligible handicapped individuals a monthly support amount, as well as offering free medical, dental, optical and other services. Obviously this is very important to most families as a financial benefit for the handicapped child. However, the provincial plans impose a financial test on the handicapped individuals so that if the individual has either more assets or more income than is allowed, they lose their benefits.

While parents are interested in setting up an RDSP, they want to make sure they don't lose those provincial benefits.

The Canada Revenue Agency has clearly stated that the money paid into an RDSP and the earnings on that money are not counted as an asset for the purpose of figuring out what a handicapped individual owns. In other words, opening an RDSP will NOT cause your child to be cut off from provincial benefits.

A few highlights about RDSPs:

• - a handicapped person is the beneficiary of the RDSP


• - there can be only one account per beneficiary


• - the account can be opened by the beneficiary him/herself or by the parents or legal representative of a beneficiary


• - the beneficiary must live in Canada


• - the maximum amount that you can contribute to the RDSP is $200,000 during the beneficiary's lifetime, but there is no limit per year


• - contributions put into a plan are not tax-deductible


• - anyone can put money into an existing RDSP


• - contributions must stop the year the beneficiary turns 59


• - there are matching government grants that are based on family income


• - the government matching grants can be as high as $70,000 during the beneficiary's lifetime


• - there are additional grants (bonds) for low-income families


• - when the beneficiary takes out money, he or she does not pay tax on the amount that the family contributed; he or she only pays tax on the portion the government contributed, and earnings on the government contributions


• - when the beneficiary dies, any money left in the RDSP must go into his or her estate.

If you want to know more about these, talk to your banker or your financial planner.