A Henson Trust is one of the most powerful estate planning tools available to Canadian families with a loved one living with a disability. Named after Leonard Henson who cared for his disabled daughter, this type trust is specifically designed to allow a person with a disability to inherit assets without losing their eligibility for provincial government support programs. The key characteristic of a Henson Trust lies in its absolute discretion.
In a typical trust, the beneficiary can have a legal right to a certain amount of money. In contrast, in a Henson Trust the beneficiary has no legal claim to the assets and cannot demand money from the trust. Designated trustees have full discretion to control and decide if and when any money is paid to the beneficiary. Because the person with the disability does not have ownership of funds inside the trust, provincial governments exempt Henson Trusts from asset limits when determining eligibility for social assistance and disability benefits.
Are there limits to the amount of assets inside Henson Trust?
No, a Henson Trusts is not subject to upper limits and can hold unlimited amounts of capital without affecting eligibility for provincial disability supports.
When does a Henson Trust make sense?
When someone is planning on leaving large amounts of money to a loved one with a disability, a Henson Trust would be one of the recommended solutions to protecting their government benefits.
How is a Henson Trust established?
Establishing a Henson Trust is a complex legal process that often requires the help of a lawyer or estate planner. It is strongly recommended to seek out advice from a professional experienced with disability focused estate planning.
There are two main ways to establish a Henson Trust:
Testamentary Henson Trust (through the will of the deceased)
Created through a will, which also means the trust does not exist until the person setting up the trust passes away.
Will often qualify as a Qualified Disability Trust (QDT), which means the trust will be taxed at lower, graduated tax rates rather than the highest marginal tax rate.
Inter Vivos Henson Trust (also known as Living Trust or Gift between the living)
The person establishing the trust signs a trust deed with their chosen trustees and settles the trust by contributing in an initial amount of money or property.
Unfortunately, this type of trust is taxed at the highest marginal tax rate on any income as it does not qualify as a QDT.
Who should be appointed as trustee?
Since a trustee has absolute control over a Henson Trust, choosing the right person is vital. They must be capable of balancing trust distributions with benefits like the Ontario Disability Support Program (ODSP) to prevent clawbacks, while understanding the needs of the beneficiary to maintain their quality of life. To ensure long term success, the trustee should be trustworthy, and ideally able manage the trust’s administration and tax filings for the beneficiary’s entire life.
It may also be prudent to appoint a secondary trustee, or alternative trustee, in the event that the original trustee is unable to continue their duties because of death or incapacity.
More on Qualified Disability Trusts
A Qualified Disability Trust (QDT) is essentially a tax advantage status for a Henson Trust, allowing the trust to be taxed at lower, graduated rate rather than the highest flat tax rate, saving money on taxes. To qualify as a QDT, the trustee must fill out CRA Form T3QDT (Joint Election for a Trust to be a Qualified Disability Trust) and file this alongside the trust’s T3 tax return. This form must be completed every tax year and signed by both the trustee and the beneficiary.
To qualify as a QDT, the trust must meet three specific criteria:
- The trust must be a testamentary trust and triggered by the death of the person who created the will. Therefore, an Inter Vivos Henson Trust Henson does not qualify as a QDT.
- The beneficiary of the trust must qualify for the DTC.
- A beneficiary can only have one QDT at a time. If someone has multiple Henson Trusts set up by different relatives, they must choose only one to designate as the QDT for that tax year.