Friday, July 3, 2009

I Think I'll Have A Henson...

You want a what? The first time I heard the above expression, I wondered if Molson's or Labatt's had some new competition in the Canadian beer market. My next thought (having young girls) was that it must be some new (and therefore annoying) band. I seem to recall three brothers who...boy am I old. My daughter informed me that "Hanson" was so yesterday. I wonder what she thinks of the Beatles -that was so biblical? I could not have been farther from the truth as to what a Henson was.

Wikipedia defines a Henson Trust as:

Henson trust (sometimes called an absolute discretionary trust), in Canadian law, is a type of trust designed to benefit disabled persons. Specifically, it protects the assets (typically an inheritance) of the disabled person, as well as the right to collect government benefits and entitlements. The key provision of a Henson trust is that the trustee has "absolute discretion" in determining whether to use the trust assets to provide assistance to the beneficiary, and in what quantity. This provision means that the assets do not vest with the beneficiary and thus cannot be used to deny means-tested government benefits.
In addition, the trust may provide income tax relief by being taxed at a lower marginal rate than if the beneficiary's total assets were considered. It can also be used to shield assets from matrimonial division in case of divorce of the beneficiary. In most cases, the trust assets are immune from claims by creditors of the beneficiary. The Henson trust was first used in Ontario in the late 1980s. It became of wider interest when the Supreme Court of Ontario ruled in 1989 that the trust assets were not vested in the beneficiary and thus could not be used to terminate government benefit programs. A Henson trust can be established as either a living trust, or a testamentary trust.

When a Guelph man by the name of Leonard Henson died, he left his money — in trust — to his disabled daughter Audrey. In order to prevent the trust from negating Audrey's government benefits, it was set up in such a way that the trustee had "absolute discretion" over the assets (meaning they would be paid out as the trustee saw fit, not according to the wishes of the beneficiary). This meant that Audrey did not actually own the assets, and could therefore go on collecting both the government benefits as well as receiving payments from her father’s trust. At Audrey's death, the assets would go to charity. In 1987, the Ontario Ministry of Community and Social Services took the matter to court and attempted to prove that Audrey did indeed enjoy beneficial ownership. The government, however, lost the case and the "Henson trust" was born — an absolute discretionary trust that allows the beneficiary to collect government benefits while at the same time receiving private income, without any restrictions on how that income is to be used.

Now for the English translation of the above explanations. When someone who suffers from a qualifying disability in the province of Ontario, they may be eligible for benefits from the government. This is affectionately known as ODSP (Ontario Disability Support Program). The program comes in two forms - income support (money for people who qualify) and employment support (help finding work for people who qualify). The government does not like handing over funds to people who don't need money. If the person has too many "assets", they may be ineligible to receive support (income). For a single person, the maximum asset value is $5,000. Some assets are "exempt". Here are some examples of exempt assets:

  • The home you own and live in.
  • Your primary vehicle (the one you use the most, if you have more than one).
  • Trust funds derived from an inheritance or life insurance policy, up to allowable limits.
  • Necessary household and personal items, such as furniture and clothing.
  • Pre-paid funerals.
  • Registered Education Savings Plans (RESP).
  • Registered Disability Savings Plans (RDSP).
  • Cash surrender value of life insurance policies, up to allowable limits.

What I find very interesting is this - what defines a "life insurance policy". For you and each family member, up to $100,000 of the cash surrender value of a life insurance policy is exempt as an asset under the Ontario Disability Support Program. This means it does not affect your eligibility for Income Support. Under the Ontario Disability Support Program, life insurance includes:

  • Annuities
  • Deferred annuities
  • Segregated funds

Segregated funds are the insurance industry answer to mutual funds. They work in a similar fashion, and hold similar types of investments. The fees are typically higher than with mutual funds, but they offer guarantees at both maturity and death. What I find most interesting is that someone who is receiving ODSP benefits could hold $80,000 in a segregated fund without penalty, but having $8,000 in a similar mutual fund would result in lower income benefits.

As you may already know from a previous blog, last year the federal government introduced the RDSP (Registered Disability Savings Plan). It is a savings plan designed specifically for people with disabilities in Canada. The first of its kind in the world, this new tax-deferred savings vehicle will assist families in planning for the long - term financial security of their relatives with disabilities. Contributions to the plan can earn grant money as well as a bond each year. Anyone can contribute to the plan, but only one plan is allowed per person. The RDSP does not replace the Henson Trust but rather works in concert with it.

The remaining problem for the Henson Trust is how best to arrange for funding. There are a variety of resources within the reach of most families which can be used to fund the trust. They are:

Savings. The establishment of a regular savings program may be able to provide adequate funds to Henson Trust.

Parent's Estate. Provided that the parent's estate is sufficiently large, it could provide for their own needs in their elder years, as well as having enough left over to fund the trust.

Family Members. Siblings, Aunts and Uncle's, Grandparents could be willing and able to provide money to fund the trust.

Life Insurance. For the average family, life insurance may be the only way that they can leave a large lump sum to the trust by making small monthly payments. It is also possibly the only way of funding a trust that is guaranteed. The other resources mentioned above may not always be available but a paid-up life insurance policy can guarantee future funds.

Families of people with disabilities should examine the benefits and pitfalls of each of the funding methods mentioned here. A review of these resources with an Estate Planning Professional who specializes in planning for people with disabilities would be an excellent starting point.

Info above courtesy of:
The "Special Needs" Planning Group is an organization that is made up entirely of parents of people with disabilities. We feel that this is important since we believe that no one can simply read a book and truly understand the feelings and concerns that parents have with respect to the needs of their sons or daughters with disabilities. We are experienced, knowledgeable professionals who understand the issues because we are living those issues. We use a team approach to planning using Planners, Lawyers and Accountants, all of whom are specialists in planning for people with disabilities. In addition, we provide solutions which include much more than just a will and a trust account.

Stay Well and Pay It Forward.

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