The "Special Needs" Planning Group
Planning Tools and Techniques
Tools and Techniques
This section of our web site contains some tools and techniques that are most often used in the process of planning for people with disabilities. We recognize that each and every family's situation is unique. However, virtually every family can benefit from the use of these techniques. Before entering into the realm of planning for your son or daughter with a disability, you should become familiar with these tools and techniques. We don't expect you to become experts in Life Planning or Wills and Trusts but you should have a basic level of understanding about the manner in which they interconnect in plans for the future of people with disabilities.
A Will is a legally enforceable set of instructions that you leave to people whom you have chosen which tells them how to distribute your estate after you have died. A properly prepared Will can allow you to "Have It Your Way" when it comes time to distribute your assets. It must be created in a specified manner in order that it be considered to be a legal Will. When we have a family member with a disability, the Will often creates an Absolute Discretionary Trust (Henson Trust) which is designed to provide a pool of resources for the person with a disability without disqualifying him or her from receiving ODSP benefits. One of the key people in the Will is the Estate Trustee (formerly called the Executor). The Trustee is usually your spouse or another person (or institution) that you trust if your spouse has pre-deceased you. Often, alternate Trustees are named to be act if your first choice has died or is unable to act on your behalf. Your Trustee should be someone who has sound judgement, good business sense and can act impartially if there is a dispute between beneficiaries of your Will. In general, the Estate Trustee will be responsible for all aspects of the administration of the estate. This includes gathering and distributing your assets in accordance with the instructions contained in your Will. Some additional duties of an Estate Trustee are:
Most valid Wills for families with sons or daughters with disabilities, in Ontario, contain several clauses.
These typical clauses are:
Each of these clauses should be discussed and incorporated in your Will if they have relevance to your situation. It is recommended that you familiarize yourself with these clauses before entering into discussions with your lawyer to create your Will.
Types of Wills
In most Provinces of Canada, people can write their own Wills and have it be considered legal. This type of Will is called a Holograph Will and it requires no witness to the signature. However, the Holograph Will must be completely written and signed in the person's own handwriting in order for it to be legal. This is often considered to be the easiest type of Will to create since it doesn't require a lawyer. However, the Holograph will should only be used in cases where there is a very simple estate to be distributed and where the Testator feels that he or she has enough information about the legal requirements of a Will to be comfortable in preparing one. This is seldom the case when dealing with planning for our sons or daughters with disabilities. The "Will Kits" that are offered via the radio and television media are somewhat similar to the Holograph Will. In the opinion of many lawyers in Ontario, the Will Kits are of very limited value to a family with a family member with a disability. They do not allow for the creation of an Absolute Discretionary Henson Trust and as such, would probably result in our children with disabilities being disqualified from receiving ODSP benefits. The old saying "penny wise and pound foolish" is very apt in these cases. The extra money spent when using the services of a Lawyer to create your Will is usually money well spent, particularly for families with a member with a disability.
The second type of Will is known as the Formal Will. This is usually a document that is prepared by a lawyer which contains the signature of the person making the Will and the signatures of two witnesses. The witnesses must in fact witness the signing of the document by the Testator ( the person making the Will) and each other. They must not be a person or the spouse of a person who will benefit under the terms of the Will. This type of Will provides the highest level of peace of mind. It ensures that your wishes will be carried out after your death and such a Formal Will is well worth the expense associated with its creation.
In conclusion, the Will is a very important tool that we make use of when planning our estates. It is particularly important when our plans include the well being of our sons and daughters with disabilities since it establishes the Henson Trust. More information relating to the Henson Trust is located in the Trust section of this web site.
What is a Trust?
Generally, there are two classifications of trusts that are available for use in Ontario. A trust that comes into effect during the lifetime of the settlor is called an Inter-Vivos Trust. An Inter-Vivos trust has the advantage of operating while the settlor is alive but its major drawback in planning for a person with a disability is that income earned in this trust is taxed at the highest marginal tax rate. As such, the Inter-Vivos trust is not commonly used in planning for people with disabilities. A trust that comes into effect after the death of the settlor is called a Testamentary Trust. It receives more favourable tax treatment and so is most commonly used for planning for people with disabilities. When planning for the well being of our sons and daughters with disabilities, we are usually attempting to protect their entitlement to government support programs. Two distinct types of trusts are used for that purpose. They are what we call the Inheritance Trust and the Absolute Discretionary (Henson) Trust.
THE INHERITANCE TRUST
The Ontario Government has heard a great deal of comment from parents regarding the issue of ODSP entitlements and the $5,000 asset limits imposed on them. On August 1, 1993, the Government installed what we call the Inheritance Trust. It was modified effective June 1, 1998 to state that a person receiving ODSP benefits was allowed to inherit up to $100,000 without having their benefits terminated. At first glance, this seemed to be a move forward however upon further examination of the legislation, it became apparent that the use of this kind of a trust is not always advisable. Money received from the Inheritance Trust will not affect the recipient's entitlement to ODSP benefits if they are follow the income rules which exempt the first $6000 in a 12 month period or if the funds are used for disability related items. If they don't follow these rules then they will be deducted from the person's ODSP cheque dollar for dollar over the next 12 months. . In addition, the Ministry of Community and Social Services has stated that if the Inheritance Trust is at the maximum level of $100,000, and it earns interest which is not spent in the given year, then that interest amount will be deducted from the ODSP cheque over the next year. This means that the Inheritance Trusts are not allowed to accumulate income once it reaches its maximum level. The Inheritance Trusts is created by the person with a disability and as such, it is considered to be an Inter-Vivos Trust which attracts tax at the highest marginal tax rates as outlined above.
Because of the above mentioned reasons, we do not usually recommend the use of The Inheritance Trust as an effective planning tool. Rather, it is suggested that using the Absolute Discretionary Henson Trust may be a better alternative.
In Ontario, perhaps the best way of providing for our sons and daughters with disabilities while at the same time preserving their entitlement to the Ontario Disability Support Program funding is by the use of an Absolute Discretionary Trust following the Henson format. The terms "Absolute Discretionary Trust", "Discretionary Trust" and "Henson Trust" are often used interchangeably but all three when used in the context of planning for a person with a disability refer to a very specific type of trust. The Henson trust can be established either as an Inter Vivos or a Testamentary Trust. The most commonly used type of Henson trust is the Testamentary Trust established in a parent's or caregiver's Will.
History of the Henson Trust
The Henson trust had its origins in the city of Guelph, Ontario. During the early 1980's, a gentleman by the name of Leonard Henson lived in the Guelph area and he had a daughter named Audrey. Audrey was a person with a developmental disability and she lived in a group home managed by the Guelph Association for Community Living. Leonard knew that if he left his estate directly to his daughter, it would exceed the allowable asset limits as set out by the Family Benefits Allowance (now called the Ontario Disability Support Program). He realized that having assets in the hands of his daughter directly would not be to her advantage and that her benefits would be terminated until the assets were "spent down" to a level below the threshold amount. In addition, Leonard's wife had pre-deceased him and he had no other family. Therefore, Leonard went about to find a way to leave his estate to his daughter without interfering with her entitlement to government supports. He conferred with a number of legal people and advocacy organizations and even investigated what was going on in other jurisdictions within and outside of Canada. Eventually, he discovered a technique that would allow Audrey to retain her government benefits while at the same time allowing her to receive quality of life enhancements from his estate. That technique was the use of the Absolute Discretionary Trust to be created in his Will as a Testamentary Trust. Leonard updated his Will with his lawyer. Unfortunately, he then died. At that point, the Will required the creation of an Absolute Discretionary Trust which appointed the Guelph Association for Community Living as Trustee and his daughter Audrey as beneficiary of the trust. Once Audrey died, his Will instructed that the remaining funds in the Trust were to be passed on to the Guelph Association for Community Living. The Ministry of Community, Family and Children's Services, the ministry which controls the FBA (ODSP), determined that Audrey had inherited the estate of her father and since it was in excess of the allowable amount of assets, they terminated her benefits. The Guelph Association for Community Living challenged this decision and to make a long story short, the Ministry took the trust and the Trustee to court. The first court found that the funds contained in Audrey's trust account did not meet the FBA (ODSP) definition of assets and therefore, it ruled in favor of the Trustees. The Ministry was not at all impressed with this decision and so they launched an appeal. The appeals ultimately reached the Supreme Court of Ontario and in September of 1989, the appeal was dismissed. The Government lost and what that decision did for families with a son or daughter with a disability was to provide us with a vehicle in which we can place assets for our children without disqualifying them from receiving the ODSP payments to which they would otherwise be entitled.
Trustees play a very important role in planning for our sons and daughters with a disability. Very often, they are required to replace us in handling the financial decisions that affect the person with a disability's well being and quality of life. Some factors which must be considered are:
The overall guiding principle to be adhered to by your Trustee(s) is that they must act in a way that is consistent with what a prudent individual would do. The trust money is not theirs and as such they must manage it with the utmost integrity and responsibility with particular reference to the fact that they will be scrutinized for their work.
The Trustee(s) must do the following:
We expect a great deal from our Trustee(s) and therefore, it might be a good idea to list the qualifications which we would expect from our Trustee or group of Trustees if they are to do an excellent job for us. Mr. Harry Van Bommel, in his book: Trusts and Endowment has prepared a very useful list of items which should be considered when selecting a trustee or group of trustees. In a Perfect World, these people would be able to:
We are expecting a great deal from our trustees and to find the Perfect Trustee is not often possible. However a group of trustees could meet the challenge.
Once we have determined that we wish to provide for our son or daughter with a disability through the use of the testamentary Henson Trust, we need to turn our attention toward how we are going to provide money to the trust. There are a variety of resources within the reach of most families which can be used to fund the trust. They are:
Savings. The establishment of a regular savings program may be able to provide adequate funds to Henson Trust.
Parent's Estate. Provided that the parent's estate is sufficiently large, it could provide for their own needs in their elder years, as well as having enough left over to fund the trust.
Family Members: Siblings, Aunts and Uncle's, Grandparents could be willing and able to provide money to fund the trust.
Life Insurance: For the average family, life insurance may be the only way that they can leave a large lump sum to the trust by making small monthly payments. It is also possibly the only way of funding a trust that is guaranteed. The other resources mentioned above may not always be available but a paid-up life insurance policy can guarantee future funds.
Families of people with disabilities should examine the benefits and pitfalls of each of the funding methods mentioned here. A review of these resources with an Estate Planning Professional who specializes in planning for people with disabilities would be an excellent starting point.
Over the last few years, in the Province of Ontario, we have experienced a time filled with government cutbacks and increased demands on the registered charities providing services to people with disabilities. At the same time, families are looking for ways and means of reducing the tax liabilities that are faced at our deaths. When done correctly, planned giving benefits both our society and you, the donor.
Planning for a person with a disability presents several opportunities for planned giving. Firstly, when the parents die, there is an opportunity to provide funds directly to your favourite charity or the organization that is or has supported your son or daughter with a disability. This can be set up in such a manner as to reduce the tax liability of the parent in the year of their death. In addition, vehicles like the Charitable Remainder Trust can be established at the death of the parents to allow a stream of income to be deposited to the Henson Trust for the life of the person with the disability, provide immediate tax relief to the donor and provide a donation in the long term to the charity.
Once a person for whom a Henson Trust has been established dies, there is another opportunity for planned giving. Many families establish the Henson Trust in such a way as to deliver the remaining money, after the death of the person with a disability, to charitable organizations which have provided support to that person.
Planned giving is a vital part of many organizations in our society. Providing exact details on how to set up a planned giving program is beyond the scope of this web site however further information can be provided. Simply contact us for further information.
An Estate Planning Guide for Families of People With a Disability
Submitted by Graeme Treeby of the Special Needs Planning Group. For further information on setting up your RDSP email him at: firstname.lastname@example.org or call 905 640-8285
The RDSP is a savings plan that was introduced by the Federal Government of Canada in 2007 and implemented in December 2008. The focus of the RDSP is that of a long term savings plan for people with severe disabilities that will help to enhance their well being in the future. It is modeled after the Registered Education Savings Plan which means that the contribution of money into the RDSP does not result in an immediate tax reduction to the contributor. Earnings within the RDSP accrue on a tax deferred basis which means that there is no requirement to pay taxes on the growth within the plan until funds are withdrawn. Payments coming from the plan can be used for any purpose and must begin no later that the year in which the person with the disability turns age 60. In order to qualify for the RDSP, the person with the disability must qualify and continue to qualify for the Disability Tax Credit under the Income Tax Act.
The RDSP has a structure which involves the Plan Holder and the Plan Beneficiary. The beneficiary of the RDSP is the person with the disability. The plan holder is usually the person who establishes the plan and who has control over the financial aspects of it. The plan holder can be the plan beneficiary if that person has the ability to enter into legal contracts. If the beneficiary of the RDSP is under age 18, a plan can be established by the parent or legal guardian. If the beneficiary is over age 18, a plan can be established by the individual himself if he is legally competent or by his legal representative if he is not. A legal representative would be a Power of Attorney for Property or a Legal Guardian.
An RDSP contains three elements. These are: Private Contributions, Canadian Disability Savings Grants and Canadian Disability Savings Bonds. Each of these will be discussed next.
Once an RDSP has been established, anyone can contribute to the plan provided the plan holder has given written permission to that effect. This means that the beneficiary's parents, family members, neighbours and others, including the person with the disability can make deposits into the plan. This represents a significant benefit to the person with the disability since those people who may have been looking for a way to contribute financially his well being now have a vehicle in which to do so.
These contributions are limited to a lifetime maximum of $200,000 but any amount, subject to the $200,000 limit, can be contributed annually. Spreading of large deposits over a number of years may be more advantageous as will be seen when looking at the Canadian Disability Savings Grants and Bonds. When a private contribution is made, there is no income tax deduction for the contributor and these payments can only be made up until the end of the year that the beneficiary turns age 59.
Canadian Disability Savings Grants:
A very significant component of the RDSP is the CDSG. The Federal Government of Canada will make contributions to an existing RDSP as Canadian Disability Savings Grants when private contributions are made up until a lifetime maximum of $70,000 is reached or until the end of the year in which the RDSP beneficiary turns age 49. The amount of grant in a specific year is based on the net income of the parents of the RDSP beneficiary until he or she reaches 18 years of age and on the individual's own income if they are over age 18. If the net income is less than $75,770 (2009 numbers) then the first $300 of private contributions will attract a CDSG of $1,500 and the next $1,000 of private contributions will attract $2,000 for a total CDSG of $3,500 for a total private contribution of $1,500. If the net income is over $75,770 then a contribution of $1,000 will attract a maximum of $1,000 of CDSG. This amount or any combination of grants will apply annually until the maximum lifetime grant of $70,000 is reached or until the end of the year in which the RDSP beneficiary reaches age 49.
Canadian Disability Savings Bonds:
In addition to the Canadian Disability Savings Grants, the Federal Government has introduced the Canadian Disability Savings Grants. The CDSB are available to lower income families up to a lifetime maximum of $20,000. These funds are available up to $1,000 per year until the $20,000 maximum is reached or until the end of the year in which the RDSP beneficiary reaches age 49. No Private Contribution is required at all if the net income is below $21,229 and the Government will deposit $1,000 to the plan. This amount is reduced proportionately if the income is between $21,229 and $37,884. For most people in Ontario who receive ODSP payments, an annual contribution of $1,500 will result in a contribution from the Federal Government of $4,500 until a total of $90,000 of grants and bonds is reached.
Payments From the RDSP:
As time goes on, the RDSP is expected to accumulate Private Contributions, Canadian Disability Savings Grants, Canadian Disability Savings Bonds and interest earned on those deposits into a plan. The intended goal is to provide for the long term benefit of the beneficiary of the RDSP. In order to benefit from a plan, payments must be made from the plan. These payments can be used for any purpose.
There are two types of payments that can be taken from an RDSP. The first type of payment is called the Disability Assistance Payment. The DAP is defined as being a periodic withdrawal from the RDSP at different points of time through out the life of the plan. These withdrawals can only be made if the Private Contributions made into the plan are greater than the Government Contributions to the plan. For most people; those who will only make the minimum contribution to attract the maximum government grants and bonds, this payment from the RDSP will not be possible. If a payment from the plan is made, any and all CDSG and CDSB contributions for the prior ten years must be repaid to the Government. This is called the Holdback Amount and could amount to $45,000 of repayment to the Government. In addition, the amount of the payment is further limited by the need to insure that at least the Holdback amount remains in the plan.
The second type of payment from the plan is called the Lifetime Disability Assistance Payment. This payment must begin no later than the beneficiary's age 60 and once these payments begin, they can not stop. The size of the payment is determined by formula based on the life expectancy of the beneficiary of the RDSP. The standard life expectancy has been set at age 80 + 3 years. If a doctor will attest to the fact that a person's life expectancy is less than age 80 then the formulae can be adjusted. As an example, if the beneficiary of the plan begins the payments at age 60, then the size of the payments will be 1/23rd of the value of the fund. If the beneficiary begins the payments at age 50, the size of the payments will be 1/33rd of the value of the fund.
Taxation of Payments From a RDSP:
Each payment that is made from an RDSP is considered to be made up of three components as determined by a formula in the legislation that created the RDSP. The first component is Private Contributions and these come out of the RDSP on a non taxable basis. The second component is Canadian Disability Savings Grants and Canadian Disability Savings Bonds. Both of these components are taxable in the hands of the beneficiary of the RDSP.
The final component is the income that has been earned on the private contributions, CDSG and CDSB contributions. This income has not been taxed throughout the accumulation period and so is now taxable in the hands of the beneficiary of the RDSP.
Death of the Beneficiary:
When the beneficiary of the RDSP dies, several things occur. Firstly, all CDSG and CDSB payments made into the RDSP during the prior 10 years are fully repayable to the Federal Government. After that, taxes must be paid by the estate of the deceased beneficiary and then distributions can be made. These distributions are based on the will of the beneficiary assuming that he or she has the mental ability to created one and that one has been created. If no will has been created then the Provincial Estate Laws will be followed. These laws generally provide for a distribution to the disabled person's next of kin. If at all possible, the preferred basis of distribution of the balance of a Registered Disability Savings Plan is the will of the beneficiary of the plan.
Benefits of the Registered Disability Savings Plan:
The RDSP has a number of benefits to most people with disabilities in Ontario. To make use of the Federal Government's generous grants and bonds makes sense to most people and their situations. The accumulation of these funds along with the income that they earn in a tax deferred vehicle will enhance the size of the savings over the long term. The eventual withdrawal of funds from an RDSP will enhance the quality of life of the person with the disability.
Registered Disability Savings Plan and the Henson Trust:
The RDSP can be viewed as an enhancement to the Henson Trust in that they will complement each other. The Henson Trust and funding of it through Life Insurance policies has always had to deal with the effects of inflation. Inflation may eventually eat away at the purchasing power of the dollars that are being left behind by families in the Henson Trust. Now there is the RDSP which can be seen as a "top-up" tool. It will "top-up" the dollars that have been left into the Henson Trust and thereby help to offset the decreased purchasing power over time of the life insurance left into the Henson Trust. The RDSP must be viewed as a supplement to the Henson Trust; not a replacement. The restrictions on the withdrawal timing and amounts on the RDSP limit its effectiveness when more that the legislated withdrawal amounts are needed by the person with the disability. The Henson Trust has no such restrictions and so larger, periodic amounts can be taken from it. It can also be noted that sometimes the RDSP funds will be available before the Henson Trust. Generally the Henson Trust funds will become available at the death of the parents while the RDSP funds may become available before the death of the parents and no later than the year in which the beneficiary turns age 60.
The combination of the Henson Trust and the RDSP will move us closer to the providing of our sons and daughters with the decent quality of life that they deserve.