The extent and nature of a dependent’s disability, capability and level of financial need are factors which may drive the shape of a prudent estate plan. There is no “one size fits all” prescription: each estate plan should be tailored to meet the specific situation’s unique objectives and needs.
Concerns may be particularly acute for aging parents seeking effective means for the future financial care of a severely disabled adult child when they pass. Fortunately, there are a number of estate-planning techniques which, in the right circumstances, might provide measures of protection and financial security.
One useful tool under the income tax rules is the Registered Disability Savings Plan (RDSP). While not a testamentary vehicle (which takes effect only upon someone’s death), the RDSP permits qualified persons — such as parents — to become plan holders and to fund the plan so to provide future monies payable to or on behalf of an eligible beneficiary such as a disabled adult child. Contributions to a RDSP also can be made via a Will bequest.
Although the donor of the funds does not receive a direct tax benefit, the income growth within the RDSP is not taxed until monies are disbursed from the plan. Hence, the RDSP is a tax deferral technique which might be useful to reduce the overall tax burden on donors while living, and ultimately the tax burden on their estate — to the financial benefit of all their heirs. A further attraction of the RDSP is the potential for matching funds being made to a plan in the form of government-sponsored grants and bonds.
Not all persons however, may qualify or continue to qualify either as RDSP holders or as eligible beneficiaries under the tax rules. Moreover, the RDSP scheme has contribution limits and other restrictions, and does not substitute for sound testamentary planning.
Another common strategy is to establish a trust that names a disabled loved one as a beneficiary. This can be accomplished while the person who establishes and funds the trust is still living, or, alternatively, it can be a testamentary trust, established by a Will. There are many advantages and disadvantages to each approach that can’t be covered in this short discussion. However, there are two key advantages of trusts: the settlor (the person who establishes the trust) can determine who controls the trust’s funds; and the funds can be protected against claims of a loved one’s potential creditors or even against a loved one’s own misuse of the funds.
Such considerations may be of particular concern where, perhaps due to a mental impairment or personal characteristic, a loved one lacks financial “common sense” and might be susceptible to squandering an inheritance, or in cases where a loved one may be impressionable and easily manipulated. Sadly, it is not uncommon for vulnerable persons to be subjected to financial predation by the unscrupulous. Suitable trusts can help limit such financial abuse.
Where someone is receiving government-sponsored disability benefits, additional concerns might arise. A loved one’s direct receipt of a sizeable inheritance could jeopardize continued access to such benefits. Eligibility criteria for such programs typically are “means-tested,” so if a recipient has assets or income above a minimum threshold, entitlement to disability benefits may be lost.
To help avoid this, a prudent estate plan might incorporate a carefully crafted special purpose trust called a Henson trust. A Henson trust is a type of discretionary trust, meaning basically that the loved one, as a beneficiary, has no absolute entitlement to receive funds from the trust. Whether the loved one receives any payment whatsoever is wholly at the discretion of the trust’s trustee.
Given the wide discretionary authority granted to a trustee, it is imperative — perhaps more so than with any trust — to ensure that a suitable trustee is selected. Oftentimes, a capable, attentive sibling of a disabled loved one appropriately may be selected as trustee. However, care must be taken in the drafting of a Henson trust to guard against potential conflicts of interest that might arise between the trustee and the trust’s disabled beneficiary.
There always will be worries and complications when determining how best to provide for disabled loved ones in estate planning. There is no one straightforward solution. However, with some forethought, and with the assistance of knowledgeable legal and financial advisers, structures can be developed to help both maximize financial benefits and protect suitably inheritances against wastage or misuse.
(Bundgard practises estate planning and estate litigation with Evenson Bundgard LLP of Toronto.)