Liz and Mike are accountants in their 40s. Their only child, Jordan, is 16 and has Down syndrome. He lives a happy and fulfilling life, and his parents plan to save money to cover his needs after their death. They want to create the Henson Trust, a fully discretionary trust that can grow to any amount without affecting some means-tested government benefits. Since the trustee will have full control over the distributions, selecting the right person is crucial. Additionally, as the couple plans to create a will in the form of a will (effective upon the death of one or both parents), they now need to correct the details.
Experts
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Sadie Wetzel,
Associate Counsel, Davis LLP, Vancouver
Ron Malis,
Advisor, Independent Financial Concepts Group Ltd., Toronto
Ian Hull,
Co-founder of Hull & Hull LLP, Toronto
Who are you calling?
Trust and estate lawyers and financial advisors.
What are they saying
Sadie Wetzel:
Are other family members close to Jordan, or do Liz and Mike have friends who would take over this role? Naming a sibling could create a conflict of interest if surviving family members get what’s left after Jordan’s death. In such cases, the couple may wish to engage a professional trust company or third party to act as co-trustee. Many families also turn to trust companies if they do not have anyone suitable to serve as a trustee.
When selecting trustees, consider the following:
- The age of the proposed trustees and their health. You want someone who will be there for you after you die – preferably throughout your child’s life.
- Their business experience. The trustee is responsible for investing, managing and spending the money wisely, as well as for filing tax returns. Trustees may need to take time off work to meet these responsibilities.
- Fees. Family members can waive the fees, but when some learn that being a trustee is more work than they imagined, they may reconsider. Unless a remuneration agreement is formally documented, remuneration is determined either under the BC Trustee Act or in accordance with the terms of the will (hourly or annual rate). For non-professional trustees, this will typically be between 2% and 3% of capital and income, plus an annual care and management fee of up to 0.4%, depending on the size of the assets. However, the fee may increase up to 5%.
- Residence of the proposed trustee. If the trustee resides outside Canada, there may be income tax consequences and other filing obligations in the trustee’s home jurisdiction.
- Number of trustees. If there is more than one, will they be able to cooperate?
- Asset value. A person may be able to handle $50,000, but $5 million may be beyond their means.
Because Jordan is disabled, the BC Office of Public Guardianship and Trustees will review Liz and Mike’s will during probate to determine whether they have provided Jordan with appropriate, fair and equitable benefits. If not, the office may apply to the court for an order to grant a larger benefit. In our experience, the office takes a number of factors into account, including the needs of the disabled child, the value of the property, the relative needs of other dependents, and the child’s life expectancy.
Ron Malis:
The Henson Trust protects and supplements some (not all) provincial disability benefit programs, such as the Ontario Disability Support Program. To qualify for ODSP, Jordan must not have non-exempt assets worth more than $5,000, such as cash, stocks and bonds. (Exempt assets include disability-related items such as wheelchairs, primary residences and essential vehicles). Because Jordan cannot control distributions from the Henson Trust, she is also exempt.
Liz and Mike could donate Jordan’s residence to the Henson Trust in the event he needed to move to an assisted living facility – that way, if he later sold the home, any proceeds would remain in the trust. Any property or income-producing assets can also be placed in a trust.
However, Jordan cannot receive more than $6,000 in the next 12 months, including money from the Henson Trust. Any additional funds affect your ODSP entitlement or the amount taken from it.
Fortunately, withdrawals from the Registered Disability Savings Plan do not affect ODSP eligibility, so I would advise Liz and Mike to open one of these accounts. RDSPs also provide access to government grants. Moreover, unlike the Henson Trust, Jordan could control its own funds if it had legal authority.
The lifetime contribution limit for an RDSP is $200,000 and can be supplemented with matching government grants of $3,500 per year up to a lifetime maximum of $70,000. (There are additional subsidies for low-income families.) If Jordan gains an asset in the future – say, a gift from his grandparents of $20,000 that was not structured as a Henson Trust – he would be able to transfer that gift to the RDSP.
And if Liz, Mike or Jordan’s grandparents have additional funds in an RRSP or RRIF after they die, that money can be transferred to the RDSP account tax-free. She would not be eligible for government funding but would count toward the $200,000 limit. Additionally, Jordan must begin withdrawing from his RDSP the year he turns 60. He will have to pay income tax on withdrawn grants, investment income and refinancing amounts. If he needs the money before age 60, he could face a penalty: for every dollar he withdraws from his RDSP, the government will take back a maximum of $3 of the money he contributed – the maximum amount he contributed in the last 10 years. If the government made no contribution, there is no penalty.
So, if Liz and Mike start now and contribute the maximum amount each year to government grants, the RDSP will reach $200,000 when Jordan is in his 30s. This means that in your 40s you can access the RDSP without penalty.
If there is money left in the RDSP after Jordan’s death, the government will collect contributions made over the past 10 years. The remaining amount will go to his estate.
Outside of the RDSP and Henson Trust, without disturbing the ODSP, Jordan could hold up to $100,000 combined with the inherited trust value, life insurance cash value, and segregated funds (including growth). If he is able to make his own investment decisions, he will be able to buy after he turns 18, and just before applying for ODSP.
Ian Hull:
A Disability Trust covers assets under $100,000, and a Henson Trust typically covers assets over $100,000. These trusts typically provide the trustee with discretionary power to make almost any decision. That’s probably two-thirds of the document. The rest is to appoint a trustee and allow him to use both capital and income in case funds need to be withdrawn.
