Inter vivos shelter trust best for adult child with special needs

By staff
Inter vivos shelter trust best for adult child with special needs - Kenneth C. Pope Law

Many individuals who opt to buy a home for an adult child with special needs may choose to put the property in his or her name, but the use of an inter vivos shelter trust is likely a better option, Ottawa disabilities and estate planning lawyer Kenneth Pope writes in The Lawyer’s Daily.

As Pope, principal of Kenneth C. Pope Law, explains, if the child is receiving provincial disability benefits, the option of buying the home and putting it in their name is problematic, as the net proceeds from the sale of the home would disqualify them from those benefits.

“There’s also the potential for them to be manipulated by unscrupulous individuals, such as a new spouse who then divorces them,” he writes. In addition, parents who purchase a property in their own names and then rent it to their child who lives there for below market rent can’t write off the other related expenses, he says.

“In this scenario when the last parent dies, there’s a deemed disposition of the property and at that time capital gains taxes are payable. Plus, it’s part of their estate when the second parent dies and the probate fees are 1.5 per cent per thousand, $6,000 on a value of $400,000,” says Pope.

However, he says, parents who set up an inter vivos shelter trust are the settlors and typically first trustees, and can plan to have one of the child’s siblings as the alternate trustee when they are gone.

If the beneficiary child lives in the property and qualifies for the disability tax credit, the property qualifies for the principal residence capital gains exemption, says Pope.

“This means that when the child dies, or if the property is sold at some point and the cash is kept in the trust account, there’s no tax due under the present regime,” he writes. The fact that they may be receiving provincial disability benefits does not allow the same exemption, he adds.

Although parents could simply settle a large sum of money on the trust if they intend to use their own money to purchase the property, Pope says what is more likely is to take back a promissory note or a mortgage so that the value they put into the house remains part of their estate.

“If the trust fund was in fact given the settled amount this cannot be retrieved by the settlor parents as this is an irrevocable trust,” he writes.

If a commercial mortgage is required for the purchase, Pope notes that the parent settlors will have their names on title and will be on the covenant as guarantors for the mortgage.

“Commercial lenders are not interested in trying to pursue a trust or trustees in their fiduciary capacity, only in their personal capacity,” he says. In addition, Pope writes, when the parents pass away, the mortgage may be forgiven as a part of the Henson trust in the will.

An additional advantage, says Pope, is that the property isn’t considered a matrimonial home, as the trust owns it. As such, he says, if the child marries and divorces, the divorcing spouse doesn’t receive half of its value.

“The spouse does not have a matrimonial right to occupancy and can be evicted. This is a much better procedure and protects the home equity without the need for a matrimonial agreement. If you simply calculate how much probate fees are on the house on death versus the fee to set up the inter vivos trust it’s often a wash and it’s clearly the right choice,” he says.

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