You’re at the kitchen table preparing your will when the topic of supporting your disabled child throughout their life comes up.
On the face of it, you seem to have two choices.
- Leave your child enough that they can live a good life, which will restrict their access to government aid (some of which can’t simply be bought).
- Restrict the amount of money you leave your child and leave their future in the hands of government support (which could change after you’re gone).
Deciding whether your support or the government’s is more important is a very difficult decision to make.
The good news is you don’t have to make it.
With a Henson Trust, you can make sure you do everything you can for your child, without getting in the way of their government assistance.
What is a Henson Trust?
A Henson Trust is a provincially-regulated trust designed to help parents of disabled children support their children now and into the future without interfering with their ability to access government assistance.
Because this money is held in trust, and can’t be spent by the individual it’s held for, the trust doesn’t contribute to the beneficiary’s wealth. Instead, the trustees are responsible to spend the money on behalf of the individual it’s left to.
However, for the trust to be effective, the trustees must have absolute discretion to spend and distribute the money from the trust as they see fit, whether that’s a new computer or medical treatment. In this way, the beneficiary has no right to income from the trust and can’t claim or demand payments.
As a result, they are able to access government benefits that they would not be able to if the money was theirs.
This type of fund can be set up on a testamentary (established in a will) or inter vivos (established by a living person) basis to support your child.
The story of the first trust
The first trust of this type was set up by Leonard Henson, (from whom the trust got its name).
His daughter, Audra, was unable to work because of her disabilities. During his life, Leonard took care of his daughter, but he was worried about what would happen after he died. Instead of simply willing her everything, his will directed that his estate was to be put into a trust upon his death, from which the trustees could fund his daughter however they wanted.
This way, he thought, he could fund his daughter without making her ineligible for government assistance.
Unfortunately for Audra, the provincial government of Ontario attempted to take away her assistance after her father’s death despite the trust The ensuing court battle took years to move through the courts. In the end, the case was decided in her favour, but Audra had died in the interim.
But because of this legal battle, most provincial governments now recognize the Henson Trust in their tax laws, giving parent’s today a powerful tool for taking care of their disabled children even after death.
Legality in Manitoba
Because Henson Trusts are provincially regulated, their legality varies from province to province. In Manitoba, the Henson Trust is recognized as legal.
It was affirmed in the case of Quinn vs. Director of Income Security and is part of the Vulnerable Persons Living with a Mental Disabilities Act.
Tax Treatment of a Henson Trust
The Henson Trust is treated much like any other trust. It is considered its own financial entity and as such is required to file its own income tax return.
- Testamentary trusts are typically taxed at graduated rates, much like regular income. So, first $XXX of income is taxed at the lowest rates in the bottom tax bracket, with the next amount being taxed in the next highest tax bracket, and so on.
- Inter vivos trusts, however, are taxed at the highest marginal tax rate for every dollar.
Regardless of whether the trust is Testamentary or Inter Vivos, income paid out to the beneficiary is generally taxed in the hands of the beneficiary.
Do Henson trusts get special tax treatment?
Henson Trusts have a major benefit over regular trusts. It’s called the preferred beneficiary election.
The preferred beneficiary election is open to any trust where the beneficiary is suffering from an extended, severe mental or physical impairment. Also, the beneficiary must be related to the person establishing the trust (referred to as the settlor in trust law). The beneficiary can be a:
- (former or current) spouse or common-law partner,
- great grandchild
- step-great grandchild
When the beneficiary of a trust qualifies as a preferred beneficiary, a joint election can be filed in the tax return by the beneficiary, or their legal decision makers, and the trust. This allows even retained earnings to be taxed as if they’d be paid out to the beneficiary, i.e. at graduated rates.
Advantages of a Henson trust
A Henson Trust offers a host of benefits that can help you better provide for the beneficiary.
- Better quality of life: A Henson trust substantially improves the quality of life for individuals with disabilities by covering expenses like travel, clothing, and homecare attendants, all while allowing them to maintain their eligibility for government support and programs.
- Financial security: This trust ensures the financial security of the disabled person, even in the event of the settlor’s incapacity.
- Probate fee elimination: A Henson trust eliminates the need to pay probate fees on trust assets when they are to be distributed to beneficiaries other than the trust's creator.
- Tax savings: By allowing any income generated within the trust to be taxed at the disabled person's individual tax rate (for a testamentary trust), a Henson trust can lead to potential overall tax savings.
Disadvantages of a Henson trust
A Henson Trust can be a powerful tool for ensuring a disabled child is cared for throughout their life. However, they do come with some challenges.
- Difficulty Finding Trustees: Finding a trustee willing to care for a disabled person during their lifetime can be difficult. Because trustees have complete control and discretion, careful consideration is crucial.
- Conflict of Interest: Siblings, who are often the logical choice for trustees, may have a conflict of interest as they are likely to be residual beneficiaries of the trust, either during the disabled person's lifetime or upon their passing. This can create complex family dynamics and potential disputes.
- In situations where close relatives are unable or unwilling to act as trustees, or when the trust's administration is expected to extend over a lengthy period, appointing a corporate trustee, such as a trust company, may become necessary. However, this comes with its own set of costs and considerations.
- Regulatory Changes: Provincial governments have the authority to change regulations related to Henson trusts, potentially disallowing them and applying such changes to both existing and future trusts. This regulatory uncertainty can impact the trust's effectiveness.
- Disqualification: Improperly constructed trusts may inadvertently disqualify a disabled person from receiving their entitlement to disability benefits, creating financial challenges and unintended consequences.