Approximately one in seven Canadians has some form of disability, such as a long-term or recurring physical, mental, sensory, psychiatric or learning challenge or impairment. Where a family member has a disability, the family’s estate planning objectives often account for that family member’s needs.
In developing the plan, important considerations include whether the family member is expected to have capacity to manage his or her own property, will he be employable and financially self-sufficient (as opposed to relying on government support such as the Ontario Disability Support Program [ODSP]), and will he be able to make his own decisions regarding personal care. The following are three estate planning techniques that should be considered where a family member has special needs.
A trust can be useful when a family member:
- requires assistance with property management;
- requires protection in property management, such as where there is a concern the family member could be taken advantage of by others; or
- is or will be receiving support under a provincial disability support program like the ODSP.
Under the trust terms, the trustees are often given broad discretion to manage the trust property for the benefit of the family member. Distributions could be made to the family member when she requires funds, if appropriate, or the trustees could pay the expenses of the family member directly.
A trust can provide additional tax benefits if it qualifies as a qualified disability trust (QDT). A QDT is generally a trust established by will that has at least one beneficiary eligible for the federal disability tax credit. The main tax benefit of a QDT is that income retained in the trust is taxed at graduated tax rates, as opposed to the highest marginal rate (which generally applies to all other trusts). This savings can later be distributed to the family member tax-free. Note that a trust will not qualify as a QDT in a particular year, and therefore lose associated tax benefits, if the trustees and the relevant beneficiary fail to jointly elect to treat the trust as a QDT for that year, or if the trust is no longer a testamentary trust. A trust generally loses its status as a testamentary trust where property is contributed to the trust from a living person or where a person, including a beneficiary, pays the capital expenses of the trust.
If the family member is or may in the future be receiving support under the ODSP, the trust could be drafted as a Henson trust, which provides trustees with full discretion over making payments to the family member. The family member’s interest in the Henson trust itself should not jeopardize the family member’s entitlements under the ODSP, but distributions from the trust in any 12-month period to the family member would generally have to be limited to a maximum of $6,000 (not including amounts distributed for certain disability-related items, services, training, and education), subject to reductions for others amounts received by the family member, such as gifts.
A family member who qualifies for the federal disability tax credit may qualify to have an RDSP held for him as a beneficiary. An RDSP provides a tax-assisted way to plan for ongoing future payments for the family member. Income earned in the RDSP is not subject to tax, and income-tested government assistance may be available to match or enhance contributions to the RDSP.
A parent or guardian of the family member with special needs (or certain others) may open an RDSP for the family member in certain circumstances. The family member may also open an RDSP if she has legal capacity to manage her finances. A maximum of $200,000 can be contributed to a RDSP. A parent or grandparent can contribute funds to an RDSP for a financially dependent child or grandchild on a tax-free basis from certain registered plans (e.g., RRSP or RRIF) on death. An RDSP itself should not impact a family member’s entitlement to support under the ODSP. Note: when withdrawing from an RDSP, all or a portion of any government assistance that has been in the RDSP for fewer than 10 years must be repaid to the government.
3. Outright gifts
Outright gifts during lifetime, including transfers into joint ownership or on death, may be appropriate where the family member is capable of managing property. If the family member is not capable, outright gifts may not be appropriate and consideration should be given to a more protective plan, such as a trust.
As well, gifts during lifetime, inheritances, or distributions from a trust greater than $6,000 in any 12-month period may jeopardize a family member’s entitlement to receive support under the ODSP. It is possible, though, to receive an inheritance greater than $6,000 and less than $100,000 if such an inheritance is held in a special trust, sometimes referred to as an inheritance trust. The property held in it must be made available for the maintenance of the family member. If an inheritance trust is not established under the terms of the will, an inter vivos inheritance trust can be established and funded with the inherited funds in order to protect support under the ODSP as long as the funds are transferred to the inheritance trust within six months of the family member receiving the inheritance.
Planning for someone with special needs should account for his or her circumstances, including age, capacity, and whether he or she relies or expects to rely on support under the ODSP.
Originally published in Advisor's Edge Report