Supporting a loved one with a disability is a challenging responsibility with many considerations. Ensuring their needs are taken care of requires proper care and attention. The Henson Trust may be an option to provide your loved one with adequate financial support.
A Henson Trust is a type of trust in which the trustees have absolute discretion over the distribution of income and capital from the trust to the beneficiary. The trustees determine if, when and how much to distribute to the beneficiary and the beneficiary has no legal right to demand payment from the trust. This degree of control is critical to achieving the primary objective of this type of trust which is to preserve the beneficiary’s access to provincial or territorial disability benefits.
Provincial and territorial disability benefits are typically both income and asset tested. Recipients of these benefits will lose eligibility if their income or assets exceed specified amounts. Due to the absolute discretion by the trustees, assets held within a Henson Trust will not be considered an asset of the beneficiary when assessing eligibility for disability benefits. Payments from the trust may be considered income depending on the use of the payments, but the trustees can control the amounts paid to ensure the income limit is not exceeded.
Henson Trusts can be established as either an Inter Vivos Trust or testamentary trust. Inter Vivos Trusts are settled by an individual during their lifetime, and testamentary trusts are settled by an individual at the time of death through their Will. The beneficiary cannot be the settlor of the trust. There is no limit to the amount of assets that can be settled or contributed to the trust. Inter Vivos Trusts are subject to tax on any income retained by the trust at the highest marginal rate. Testamentary trusts are eligible for graduated rates for 36 months after the date of death, and then will be subject to tax at the highest marginal rate thereafter.
The trust and the disabled beneficiary may be able to jointly elect for the trust to be taxed as a Qualified Disability Trust (QDT) or for the Preferred Beneficiary Election (PBE) to apply. Both elections provide alternatives to the general rule that income retained by the trust will be subject to tax at the highest marginal rate. The QDT election ensures income retained by the trust is subject to tax at graduated rates. The PBE allows for the income of the trust to be subject to tax on the individual’s tax return and therefore subject to tax at graduated rates even though the income has been retained by the trust. These elections must be completed annually based on certain eligibility criteria.
Before establishing a Henson Trust, you must consider if this is the best option for you. Preserving access to disability benefits is the primary benefit of the trust. Assets settled into an Inter Vivos Trust will also not be subject to probate at the time of death, and there may be tax savings on amounts subject to tax on the beneficiary’s tax return. However, depending on the assets available, preserving access to disability benefits may not provide your loved one with the highest quality of life. You must also ensure you have a trustee who is willing and able to manage the affairs of the trust and will prioritize the care of the disabled beneficiary. This individual will have absolute discretion, so it is imperative that you appoint a capable and trustworthy individual.
Henson Trusts are subject to provincial and territorial regulation and may not be an option in your province or territory of residence. We must carefully review your eligibility and consult with a lawyer before establishing this trust. Careful wording is required for the trust deed or your Will to ensure that the trust will qualify as a Henson Trust.
A Henson trust can be a great tool to support your loved one. There are many other options that may be available to you as well.
For more information, please contact firstname.lastname@example.org or 1 844-GYTD-CPA