If a person with a disability receives an inheritance directly, they may lose their provincial disability benefits because these programs have strict asset limits. One of the goals of creating an inheritance plan for a disabled child is to allow them to maintain their quality of life while ensuring they are not disqualified from provincial disability support programs such as ODSP.
Henson Trust
The Henson Trust is one of the premier solutions, as it gives the trustees “absolute discretion” over the money. Because the beneficiary does not have a legal right to demand funds from the trust, the government does not consider the assets to be the child’s personal property. Funds within the trust are excluded from provincial disability asset limits.
Registered Disability Savings Plan (RDSP)
The Registered Disability Savings Plan (RDSP) is the most generous and powerful wealth building tool for disabled Canadians. The federal government provides grants and bonds up to a lifetime maximum of $90,000. Funds inside the plan are tax deferred until withdrawn, and a deceased parent’s or grandparent’s Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) can be rolled over into a child’s RDSP. Money inside an RDSP is also exempt from provincial disability asset limits.
Qualified Disability Trust (QDT)
Under Canadian tax law, most trusts are taxed at the highest marginal tax rate. However, a Qualified Disability Trust (QDT) allows a trust to be taxed at more favourable graduated rates. To qualify, the trust must be a testamentary trust (created upon death) with a beneficiary who is eligible for the Disability Tax Credit (DTC). QDT status is maintained through a joint annual election (Form T3QDT) and a T3 tax return for each tax year. A trust can be both a Henson Trust and a QDT.
Check out the QDT calculator
Life Insurance
For many parents, there may not be enough cash to justify creating a Henson Trust. Permanent or whole life insurance is another cost effective way to leave inheritance to a disabled child. This tool provides a tax free lump sum upon the parents passing, ensuring the money is available immediately.
Segregated Funds
To avoid the delays of probate, segregated funds are a unique alternative to traditional mutual funds offered by insurance companies such as London Life. They allow a named beneficiary, and because they are insurance contracts, the death benefit passes directly to the beneficiary without having to go through probate. They also protect from potential creditors of the estate.