Henson trusts are a way that family members can provide for relatives with disabilities or special needs while protecting their inheritance and preserving eligibility for government benefits. That said, the details matter when you are looking to establish a Henson Trust, and failure to create a Henson Trust in accordance with the law can put assets and benefits at risk. For this reason, it is highly advisable for anyone considering establishing one to speak with an Ontario Henson Trust lawyer when doing their estate planning.
People with disabilities can qualify for provincial government benefits. However, they lose the ability to receive these benefits if they have a certain amount of assets in their name, such as by a direct inheritance. A Henson Trust is a trust that you can set up upon death where a trustee holds and manages the person's inheritance, effectively moving legal title of the assets from the person to the trust. This is then not their own asset and allows them to continue to receive government benefits. Long standing Canadian case law confirms this as a valid way to provide for family members while receiving disability benefits.
The first thing to do would be to contact a lawyer who has experience establishing Henson Trusts. If there are any mistakes in your trust documents, your loved one’s government benefits could be on the line. One of the keys to setting up a Henson Trust is to select the right trustee. This person will be responsible for managing and making decisions about the money. Therefore, it is vital to pick someone who is responsible, sensible, and trustworthy.
The trustee(s) also protect the heir from themselves if they are financially imprudent or unsophisticated or easily manipulated by new ‘friends’.
In order to be effective as a Henson Trust, the proper terms must be written into the Will so that the beneficiary cannot receive money on demand. The trustee has an ‘absolute and unfettered discretion’ to manage and distribute the trust fund and cannot be forced to disburse from the trust.
Note that there is no limit on the value of assets that may be placed into a Henson Trust and there is no practical limit to how much can be disbursed for the benefit and needs of the beneficiary.
A testamentary Henson trust operates by moving legal ownership of assets from the party creating the trust (the settlor) to the trust. Henson trusts cannot be self-settled, meaning that the beneficiary cannot create the trust. When the trust is established, it gives the trustee the absolute discretion to give money and income from the trust to the beneficiary. It is entirely up to the trustee how they want to handle disbursements.
The Henson Trust seemingly allows for the best of several worlds for a disabled person. Their inheritance can be used for their benefit, and they are still able to receive social benefits. This money can be used to improve their quality of life. Even though they do not have access to the money on demand, there is no restriction that the trustee cannot use the money to help the person. The beneficiary will always be provided for financially and may well have a better lifestyle after their parents have unfortunately passed on.
Another benefit is the favorable tax treatment that Henson Trust income receives when taxed in the hands of the beneficiary instead of the trust. The income is attributed/declared in the hands of the beneficiary and after using their personal tax credits it is taxed at the marginal tax rate of the person instead of the top marginal rate that the trust would pay. This means in many cases that there is no income tax payable by the trust.
It is essential to select the right personal or corporate trustee. In many cases it is one or more of the siblings of the beneficiary if the family is fortunate enough to have more than one child, and if that sibling is up to the task.
Typically, the trust residue passes to the other siblings when the beneficiary passes on, so there is an inevitable potential conflict of interest. If the trustee has ‘an abundance of caution’ in disbursing funds, then there could eventually be more inherited by them. A parent knows best whether this is a likely real issue or not when they aren’t in the picture.
Finally, the tax laws regarding Henson Trusts are open to change. If you avail yourself of this mechanism, you will need to track any rule changes, so you can stay compliant with laws while preserving the right to social benefits. The Supreme Court of Canada recently (January 2019) upheld and reaffirmed the protective utility of Henson Trusts.
There are two elements to establishing a Henson Trust. First, there are legal fees to draft the trust into your Will. Second, after you pass on there may be legal fees to set up the trust, and fees for annual tax filings. If you are engaging a paid trustee to manage the money, they will be entitled to a percentage of the assets on a yearly basis for their efforts. This is usually between 1-1.5%.
The Ontario Disability Support Program have recently made changes to the rules to make treatment more favorable for disabled persons with Henson Trusts, allowing them to directly receive $10,000 over a 12-month period and to personally hold assets of up $40,000.
There are no limits to the size of the trust fund or any practical limits to how much can be distributed for the needs and benefit of the beneficiary. An annual statement of disbursements to the benefit recipient is required by ODSP, and there may be the occasional overpayment claw back, but these are a of minimal concern.
The primary benefit that ODSP provides is income support for persons with disabilities or special needs. ODSP also provides drug, dental, transportation and housing support. These benefits can be valuable especially if someone remains in the program until age 65. Families need to take steps to preserve participation in these benefit programs.
If you are considering establishing a Henson Trust for a relative or loved one, it is in your best interest to speak with an experienced lawyer. Ken Pope and his team has more than 30 years of experience helping families with special needs in Ontario and has the skill and acumen to find the right solution for your situation.