The Financial Future of your Disabled Child [download full article here]
While parents with children who suffer from mental and or physical challenges may not have it particularly easy, we are fortunate to live in a country that provides generous disability-focused social assistance programs to help alleviate some of the burdens they may face.
After an initial adjustment period, once routines are established between parent and the disabled child and the necessary support programs are in place, parents eventually arrive at a place of normalcy within their circumstances.
In the estate planning aspect of my practice, parents are overcome with having to face the thought of predeceasing their disabled child. Depending on the nature and extent of the disability, considerations can extend beyond financial support to where the child will live? Who will look after their daily needs? Who will help with their personal decision-making?
These are all important issues which makes having a robust estate plan in place vital for people who have disabled dependents.
Your Disabled Child’s Inheritance
For many of you, leaving a lump-sum cash inheritance to your disabled child is impractical and risky. Again, depending on the nature of the disability, in many cases, such persons are incapable of managing their own finances. This is where a “trust” may be useful. Setting cash proceeds into a trust fund, is a protective vehicle that many people use to secure the financial future of their dependents, disabled or not.
With a disabled beneficiary however, other considerations come into play. For recipients of Ontario Disability Support (“ODSP”), caution must be taken to avoid disentitling the beneficiary from that income supplement as a result of the value they inherit from your estate. A common solution to this issue is to set up what is known as a Henson Trust as part of your estate plan.
Henson Trusts are commonly used by families with disabled persons who stand to inherit all or part of an estate where the beneficiary is a person who receives an income supplement from ODSP that is to be protected. The reason this type of trust works, is because the ODSP program does not classify the funds in the Henson Trust as an asset of the recipient, thus enabling the person to stay within the “financial need” threshold that ODSP requires. This may seem unusual, especially if the main purpose of creating the Henson Trust is to provide an asset for the disabled person. Here’s the catch. Once the funds are placed into a Henson Trust, there is no legal mandate for the trustee of the trust to distribute or use the moneys for the benefit of the disabled beneficiary. The trust provisions impose absolute discretionary powers upon the person or persons whom you have appointed to manage the Henson Trust (the “Trustee”).
Choosing the Right Trustee
Because Henson Trusts provide complete autonomy to the Trustee, there is an inherent risk that the Trustee will not utilize the funds as you had hoped. Furthermore, if the Trustee of your Henson Trust is also a beneficiary of the trust, there may be incentives to withhold payments to the disabled person which are self-serving. In such cases, institutional trustees may serve as a safer alternative.
Private Disability Expense Trusts
If your estate is sufficient to support your disabled child for their lifetime, ODSP protection may not be one of your estate planning goals and a Henson Trust may not be warranted. Often, a less-discretionary trust is set up with the purpose of providing financial means to support the maintenance and living expenses of a disabled person. While the terms and conditions of these trusts can place further mandates on your Trustee as to how the funds should be leveraged, choosing the right person to effect the same is still an important consideration.
Registered Disability Savings Plan (RDSP)
Another useful financial planning tool for parents with disabled children who qualify for the Disability Tax Credit, is the RDSP which provides for lifetime contributions of up to $200,000 with up to 300% matching rates by the federal government. These funds are also exempt from the ODSP eligibility test, removing the risk of losing that income supplement if received in parallel by the beneficiary. To illustrate the potential gains, assume that an RDSP is opened at age 10 of the beneficiary. After 20 years at a 5% non-taxable return, the beneficiary by the age of 30 could have $198,600, by contributing $1,500 per year, quite clearly a competitive alternative to regular investing.
According to Statistics Canada, nearly 14% of our population has some form of special needs and while parents and other family members strive to enhance the quality of the disabled person’s life, it is in my view, equally important to put strategies in place to continue that lifestyle for them upon your passing.
Working with an estate planning lawyer and your financial advisor, a customized plan to accommodate your special needs child can be developed, securing their financial future.
Feel free to reach out to me for further consultation on this topic or other estate planning needs you may have.