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Canadians are in straining economic times. With the Consumer Price Index (CPI) hitting an annual increase of 3.1% in 2023, almost everyone is feeling the pressure to keep up with increasing prices.
But, for those who care for loved ones with a disability, the pressure is even greater. Their money is stretched even further to provide for loved ones that may not be self-sufficient. Not to mention the time and energy they spend caring for and serving those they love most.
These stressors are simply current, however. If you have a disabled loved one, you not only worry about their care now but also their care in the future. Uncertain economic times can exacerbate both of those anxieties.
ClearEstate was founded on helping others navigate difficult situations. Keeping with that ethos of empathetic guidance, we’ve decided to bring you the ultimate guide on Henson Trusts in Ontario. Not only will you become more informed reading this, but you’ll also have a new plan to ensure your disabled loved one’s future is financially secure.
At their core, Henson Trusts are designed to protect a disabled person’s eligibility for government assistance programs–such as the Ontario Disability Support Program (ODSP). Before getting into the details, let’s look at how Henson Trusts are defined in Ontario.
Henson Trusts are a type of trust arrangement known as Absolute Discretionary Trusts. These allow for the beneficiaries of the trust to not have a legal interest in any property/assets held in trust for them.
This non-vested arrangement means that the beneficiary can have access to property/assets without actually owning them. Without utilizing a Henson Trust, any assets held for the beneficiary could disqualify them from receiving government support.
Henson Trusts are quite flexible and can take on many forms. They can be created as testamentary trusts (e.g. part of a will), living trusts that take place during the life of the trustor, or they can take effect upon the death of the person who established the trust.
Henson Trusts were given their namesake from a famous case in Ontario –Director of Income Maintenance (Ont.) v. Henson, (1987) 26 O.A.C. 332 (DC). In short, the courts determined that a disabled individual receiving government benefits was not disqualified due to an inheritance in her name. Considering the trust was absolutely discretionary in nature, among other points, the courts determined her inheritance to not be beneficially owned by her. So, it could not be used to disqualify her from government assistance.
Briefly, Henson Trusts allow for assets to be transferred from the settlor/trustor to the trust. This moves the beneficial ownership of the assets from the settlor to the trust.
It’s important to note that this kind of arrangement is possible only if the trustees have absolute discretion to distribute the inheritance (and any income from it) as they see fit. The beneficiary cannot request any portion of assets within the trust, or its income, as they have no legal right to the inheritance.
Though these trusts are complex to navigate and establish, they do confer substantial benefits (and some disadvantages) for all parties involved.
Funds from a Henson Trust can substantially improve the quality of life for a disabled individual. Their inheritance can cover their expenses, and provide them with new opportunities, without removing them from government programs or assistance.
The trust ensures that the disabled loved one is financially secure if anything should happen to the settlor (usually the parent).
Assets held in a Henson Trust will not be subject to probate fees, so long as they are transferred outside of the settlor’s estate.
In the event government regulations adjust the use of Henson Trusts, a loved one’s access to government assistance could be severed.
Henson Trusts are complex instruments. If they are created improperly, family members could inadvertently create major financial difficulties for a disabled family member.
Considering the trustee has unfettered discretion with the disabled individual’s inheritance, choosing someone to trust with such responsibility may prove difficult.
Henson Trusts are flexible in terms of the assets that can be held within them. They can hold cash, investments, and real property. Additionally, there are typically no limits on the number of assets that can be placed in a Henson Trust. However, the province of Ontario does have regulations that restrict the amount of trust distribution and how it may be spent. We’ll get into that further on.
Ensuring your loved one has access to assets and ODSP benefits is exactly where Henson Trusts shine. According to the government of Ontario, Henson Trusts are considered to be exempt assets. This means their capital value can exceed $100,000 without affecting the disabled loved one’s eligibility for ODSP.
Though Henson Trusts do not count towards the assets of the disabled individual, how the trust is paid can count towards their income. If their non-ODSP income exceeds the set threshold, this could also significantly lower their benefits or disqualify them entirely. Again, some nuances allow family members to be strategic with how these funds are distributed.
First, any amount paid from the Henson Trust for any purpose up to $10,000 annually is considered exempt. Second, funds used to purchase a primary residence or primary vehicle are also considered exempt. Finally, income from the trust that is used for approved disability-related services or goods is also exempt from being treated as income.
As we’ve seen so far, Henson Trusts provide families with a unique way to help their disabled loved ones without removing their government assistance. But you might be wondering: how do you set them up in the first place?
Creating a Henson Trust is no small matter. Discussing the various requirements for trustees, legal requirements/terms, and finding out what kinds of assets to place in trust can be overwhelming. Here is a step-by-step breakdown to help you navigate Henson Trusts in Ontario.
Before drafting any documentation, decide what kinds of assets you want to give the trustee access to. These could be life insurance policies, cash, investments, property, or other assets. Keep in mind that these assets will have limits on how much can be distributed to not affect your loved one’s government benefits. Picking assets that are both liquid and non-liquid will give you more flexibility than choosing one over the other–but it will all depend on your context.
As mentioned before, a Henson Trust can be testamentary (part of a will), part of a trust deed (takes effect upon the settlor’s passing), or it can be a living trust. While it is not recommended for non-estate professionals to navigate complex legal instruments, thinking about how you would like a Henson Trust integrated into your estate plan is a prudent choice.
As you have noticed, Henson Trusts in Ontario are extremely complex. Navigating the ODSP eligibility requirements, selecting a competent trustee, and ensuring your disabled loved one is cared for after you are gone are all demanding tasks.
ClearEstate has estate professionals from all walks of life. Our roster is full of estate accountants, attorneys, and other professionals who have the expertise and empathy you need to navigate complex matters. The best part? You can book a free consultation right now.
You might have wondered why we did not include choosing a trustee as part of the steps to create a Henson Trust above. That’s because this step is so crucial, it requires its own section. When choosing a trustee for an absolute discretionary trust of any kind, great care needs to be taken to ensure the beneficiaries will be financially looked after. Here’s what you need to look for in a trustee.
Familiar: Because the trustee will be managing funds to take care of your disabled loved one, they need to be understanding of their exact situation. Choosing someone close to your family who understands the needs of your beneficiary, and deeply cares for them, will ensure the funds of the trust are used for the beneficiary’s exact needs. If the person you decide to go with is not deeply familiar with your loved one, they need to have a deep willingness to understand all the details of their situation.
Knowledgeable: Considering the intricacies of ODSP benefit eligibility, any potential trustee needs to have a solid grasp of the different types of income the beneficiary can receive without harming their benefits. They should also understand the other benefits available to the beneficiary such as tax credits or RDSPs. Because Henson Trusts can also come with potential tax benefits, the trustee will also need to understand how to manage the trust with these tax goals in mind. If a potential trustee is a fit in many areas aside from this characteristic, they need to seek professional help to guide them–at a minimum.
Trustworthy: There are few instances where a person will be given the kind of financial responsibility that comes with managing a trust–especially one with a trustee making all the financial decisions. Whoever you decide to appoint will need to be someone of deep character, willing to make hard decisions for the betterment of the beneficiary, and who likely does not have a conflict of interest. In cases where the trustee will receive the residue of the trust after the passing of the beneficiary, they have a conflict of interest to not distribute assets for the sole benefit of the disabled loved one. It’s vital to ensure these conflicts are not possible, or at the very least, mitigated to the utmost possibility.
Dedicated: Managing a trust is a time-consuming project, especially if the trustee is managing funds monthly. The person you have in mind should understand that managing this trust is a massive undertaking that requires much of their time and energy–for a great cause. It’s important to consider any competing demands a potential trustee could have (e.g. working a demanding job, or caring for a family member) that could get in the way of their trustee duties.
Remember: Sometimes the demands that come with managing a Henson Trust are too great for one person to bear. You do have the option of appointing multiple trustees, meaning they will have to make any trustee decisions together. Alternatively, you can also appoint corporate trustees (e.g. a law firm) to manage the trust.
Now that we’ve examined the key pillars to creating a Henson Trust, let’s look at the legal terms that need to be in place for a Henson Trust to be valid. According to a Supreme Court of Canada case in 2019, the SCC indicated that Henson Trusts need to contain three key points: the trustee must have ultimate discretion regarding trust payments, the beneficiary cannot compel the trustee to make payments to them, and the trustee is prevented from unilaterally collapsing the trust. To put it simply, the trustee must have complete control over the trust, its distribution, and its lifetime.
In addition to these three key points, the trust needs to state how remaining funds will be distributed upon death of the beneficiary. Without a clause in place describing how the remaining assets will be dealt with when the beneficiary passes away, ODSP may qualify a proposed Henson Trust as an eligible asset.
The Ontario government explicitly states that a recipient of ODSP’s assistance, who has received or will receive an inheritance, cannot place those funds in a Henson Trust to have them exempted as an asset.
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.
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.
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.
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.
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
over $49,231 up to $98,463
over $98,463 up to $150,000
over $150,000 up to $220,000
Though the general tax rules for Henson Trusts aren’t too different from other trusts, there is one exception: the 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.
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.
Remember: Section 43(5) of the ODSP Regulations states that any income that is to be considered exempt by the ODSP must be reported on annually, else those exemptions will not apply.
Henson Trusts come with ample financial benefits from protecting ODSP eligibility to securing lower tax rates. However, these trusts also offer practical benefits. Here are three of the most common.
As with many other types of trusts, Henson Trusts offer a form of asset protection for the beneficiary. Because the beneficiary does not beneficially own the assets in the trust, if they ever had a claim brought against them, their inheritance would not be subject to the lawsuit.
For families that have a disabled loved one working in a potentially high-risk environment, Henson Trusts allows for the beneficiary's inheritance to be safeguarded. Note that this assumes that the trust was created without any legal claims in place. If the trust was created during legal unrest, a judge may think differently when evaluating your case.
ODSP and other government benefits, while helpful, only go so far in providing care for your loved ones. Utilizing a Henson Trust allows you to provide for a disabled loved one in ways that benefits cannot. Want to take your loved one on a vacation? Start by placing their costs in a trust. Want to help them find private education to increase their quality of life? Start investing with funds in a trust. You get the picture.
Henson Trusts have a huge amount of flexibility that gives peace of mind to all the family.
From the beneficiary’s point of view, they know that no matter what happens to you or the trustee you appointed, their inheritance is protected. Because you have appointed a trustee (or a corporate group) that is highly competent and responsible, they know that they will be taken care of–by ODSP benefits and your financial care.
From your point of view as the settlor, you can rest easy knowing that your child is doubly cared for. Their government benefits will continue to provide them with the necessary income for them to live comfortably. And, with your funds, you can ensure they have a life they love. That's powerful.
At first glance, Henson Trusts seem to be an answer for those that are seeking to financially benefit their disabled child, without removing government assistance. And, in many cases, that is true.
But, as you’ve noticed, they aren’t simple to create. You need to make sure the trust is drafted correctly so as to not disqualify your loved one from ODSP aid. And you have to spend thousands of hours deciding on who to elect as a trustee to ensure your child’s financial future is in good hands.
That’s a lot to work through.
You don’t have to do it alone, though. At ClearEstate, we pride ourselves on having a team of expert estate attorneys that know the ins and outs of complex matters like Henson Trusts. Our attorneys are different. They don’t just solve problems, they guide families to better financial futures. The best part? You can start for free. Reach out to have a free consultation today.
The maximum amount a beneficiary of a Henson Trust can receive for "Non-Disability Related Expenses" without affecting their Ontario Disability Support Program (ODSP) benefits is $10,000 in a 12-month period. Money disbursed from a Henson Trust for such expenses must be carefully monitored to avoid exceeding this limit, as it can jeopardize the individual's ODSP benefits.
After 21 years, a Henson Trust in Ontario must adhere to two key regulations:
Accumulations Act: Income cannot be added to the trust's capital and must be distributed, either among other beneficiaries or as the trustees decide.
Tax Laws on Unrealized Gains: The trust must declare all unrealized gains on its assets as if they were sold at fair market value, and these gains are taxed at the trust's highest marginal tax rate.
These regulations affect the trust's management and taxation but do not change its primary role in supporting the beneficiary without impacting their ODSP benefits.
The tax liability for a Henson Trust depends on how the income is managed:
Income Retained in Trust: Income earned and retained in the trust is taxed at the highest combined federal and provincial marginal tax rate in the trust’s province or territory of residence.
Income Paid to Beneficiary: Income earned and paid or made payable to a beneficiary is generally taxed in the beneficiary's hands.
Qualified Disability Trust (QDT): If the trust qualifies as a QDT, income retained in the trust may be taxed at graduated rates. However, a recovery tax may apply if income taxed at these rates is distributed to a non-electing beneficiary.
Preferred Beneficiary Election: This allows some or all income earned and retained in the trust to be taxed on the beneficiary's return at their marginal tax rate, potentially taking advantage of lower tax rates.
Ultimately, the tax responsibility hinges on the trust's structure and elections made regarding its taxation.
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