Now that we’ve looked at how a Henson Trust is structured, let’s look at how it is managed by the trustee, what the taxation of this trust looks like, and how it needs to be reported on.
Trustee discretion and the role of the trustee
Being appointed a trustee is a massive undertaking. Being appointed a trustee of a Henson Trust is an entirely different role altogether. Given that control of the funds lies only in the hands of the trustee, they need to be experts in both financial planning and care for your loved one.
A trustee’s duties can be broken down into two categories: financial management duties and quality of care duties.
Financial management duties
From a financial point of view, the trustee of a Henson Trust is responsible for:
Overseeing assets of the trust. This includes investing the assets of the trust wisely, and ensuring they are managed well, all for the benefit of the beneficiary.
Distributing funds when appropriate. The trustee is solely responsible for distributing assets from the trust, and its income, to the beneficiary as they see fit. They’re also responsible for winding up the trust entirely if they so choose–for the benefit of the beneficiary.
Preparing annual tax maintenance reports and retaining records. In addition to keeping records on the trust’s income, payments made, and general accounting records, the trustee is also required to file an annual tax return. The trustee also needs to generate a report for ODSP, outlining any disbursements and income paid to the beneficiary during the year.
Quality of care duties
In addition to managing the finances of the trust, the trustee is expected to care for the beneficiary. Here are some of the responsibilities a trustee has regarding the care of your loved one:
General care for the beneficiary's well-being. The trustee typically decides where the beneficiary will live (in a care home, alone, or with others), sees to their general care, and is responsible for managing agency support for the disabled individual. They may also be looked to make legal decisions for the beneficiary.
Coordinating support. Trustees of Henson Trusts are expected to coordinate agency support for the beneficiary, as well as act as an RDSP plan holder. This means they are responsible for managing the funds of the RDSP account to ensure proper care of your loved one.
Taxation of Henson Trusts
Henson Trusts come with their own taxation nuances that any competent trustee will need to be aware of.
Henson Trusts are taxed separately from the parties named within them. This means the trust files its personal return. If any income is retained in the trust during a fiscal year, it will be taxed according to trust tax regulations. However, if funds are paid out to beneficiaries, those funds will be taxed in the hands of the beneficiary–not the trust.
Further, the type of trust used will also affect its tax return. If the trust is testamentary (located in a will) any income retained in the trust will be taxed at a graduated rate. On the other hand, if the trust is a living or inter-vivos trust, retained income will be taxed at the highest marginal tax rate. To give you a point of reference, below is a table of tax rates in Ontario for 2023.
2023 Ontario Provincial Tax Rates |
first $49,231 | 5.05% |
over $49,231 up to $98,463 | 9.15% |
over $98,463 up to $150,000 | 11.16% |
over $150,000 up to $220,000 | 12.16% |
Though the general tax rules for Henson Trusts aren’t too different from other trusts, there is one exception: the preferred beneficiary designation election.
Preferred beneficiary designation election
The preferred beneficiary designation election allows for income gained within a Henson Trust not distributed to the beneficiary to be taxed at the beneficiary’s tax rate, as though it was distributed to them. This allows for income gained within the trust to likely be taxed at a much lower rate, assuming the beneficiary has a significantly lower annual income than the trust. However, there are some specific requirements for this election to be possible.
The beneficiary needs to be suffering from a prolonged/severe mental or physical impairment as defined by the Income Tax Act.
The beneficiary must be related to the settlor of the trust (e.g. child, spouse, common-law partner, grandchild).
It's crucial to keep in mind that choosing this joint election may affect ODSP eligibility or have other unintended consequences if not filed correctly. We highly recommend reaching out to an estate accountant if you are considering this as an option for your estate plan.
Reporting requirements
Even though funds in Henson Trusts are not considered assets by the ODSP, both payments into and out of the trust need to be reported to the organization annually. These reports need to follow the verification requirements laid out by the program. Briefly, any reporting packages need to be in the form of independent documents from third parties (e.g. banks, and financial institutions) and include an explanation of the payments going in and out of the trust. In some cases, a simple yearly bank book will suffice.
In addition, the trustee also has a fiduciary duty to report any trust finances to the beneficiaries.