Although Henson Trusts were originally designed to protect the inheritance of children with special needs, they can also be an effective estate planning tool for other families, says Ottawa disabilities and estate planning lawyer Kenneth Pope.
Henson Trusts are intended to protect the inheritance of a child with special needs so they don’t lose their provincial disability benefits.
“However, they also offer estate planners an ironclad, unbreakable way of safeguarding the inheritances of other children — from divorce and matrimonial division of assets as well as from bankruptcy,” Pope tells AdvocateDaily.com.
“Before the Henson Trust was created, if a family member with special needs was receiving Ontario disability support benefits and received an inheritance, that money was considered an asset and disqualified them from benefits unless special arrangements were made in the parents’ will,” he says.
He explains, in Ontario, a person receiving disability payments is only allowed to have $5,000 in assets at any given time, but with a Henson Trust, all inherited assets are placed under the care and control of a trustee who administers it on behalf of the beneficiary.
“Inheritances placed in a properly prepared Absolute Discretionary Trust are not the asset of the child and will not affect provincial benefits,” says Pope, principal of Kenneth C. Pope Law.
Under Canadian tax law, there are three types of testamentary trusts: a Graduated Rate Estate (GRE), Qualified Disability Trust (QDT), and all other testamentary trusts (OTTs).
It used to be that all testamentary trusts were generally taxed in the same way — at the same graduated tax rates as any individual, but as of Jan. 1, 2016, OTTs are taxed at the highest federal tax rate while GREs and QDTs are not, reports the Globe and Mail.
“The taxation of testamentary trusts has changed, but as long as income is declared or attributed in the hands of beneficiaries who are in lower tax brackets, there’s no real change,” Pope says. “Now all income in the hands of the trust is taxed at the top marginal rate of 44 per cent, but if the income is declared in the hands of a beneficiary, it’s taxed at a substantially lower rate.”
One of the common misconceptions around Henson Trusts is that there’s an upper asset limit of $100,000, but that’s not the case, he says.
“People have heard about this $100,000 limit and think it applies to Henson Trusts, but in practice, there is no restriction to how much can be held or disbursed for the child’s benefit,” he says.
Henson Trusts also allow parents or grandparents to sprinkle income among grandchildren or to protect assets in the event of a divorce, Pope says, adding that clients are raising this issue more often.
“If you receive $100,000 inheritance from your father, and you and your husband use it pay down your mortgage, you won’t ever get $50,000 back in the event you divorce,” he explains. “But if you receive this inheritance as a Henson Trust, that trust in not divisible in the event you get divorced.”
Henson Trusts are also a tax-efficient way of taking care of the siblings or other relatives of a child with special needs, Pope says. In many cases, the amount of money in the trust is more than the child requires, and whatever remains after the child’s death can be redistributed among his or her siblings.
“Parents often ask how much money they should leave to make sure their child is taken care of,” he says. "If you leave $300,000 trust for the child, the income it generates — especially if it’s not taxed because it’s declared in the hands of a child — will accumulate over time.
“When the child dies, it typically goes to the siblings so it stays in the family and is protected in a very tax-efficient way," Pope says. "In fact the siblings often receive more than they would have otherwise.”