Estate planning for disabled beneficiaries

Estate planning always requires careful consideration and planning, but when your estate plan will be providing for a disabled beneficiary, even more care is needed.

A poorly planned inheritance can render that beneficiary ineligible to receive Ontario Disability Support Program (ODSP) benefits.

To qualify for ODSP benefits, a recipient must meet income and assets limits to receive payments from ODSP, which an inheritance can jeopardize.

The most common tool to avoid this is the Henson Trust. It’s an absolute discretionary trust that doesn’t allow the beneficiary to access any extra amount beyond what’s predetermined. As a result, value of the trust doesn’t count against the recipient, and only the income actually paid out is counted toward the income limits.

There’s no limit on the value of the assets that can form part of the Henson Trust. But if too much income is paid, the recipient’s ODSP payments may be cut back or lost. ODSP regulations allow someone to receive a maximum of $6,000 in any 12-month period “for any purpose” from gifts, inheritances, insurance proceeds, trusts, and certain other voluntary payments such as honorariums and lottery winnings.

That’s a maximum of $6,000 from all those sources combined, not $6,000 from each.

Other options

Any money received for the purpose of contributing to a Registered Disability Savings Plan (RDSP) won’t count toward the $6,000 annual income limit.

An RDSP and its income are exempt from the asset limit too, meaning you can give a disabled beneficiary up to $200,000, the RDSP’s maximum lifetime contribution limit, without affecting ODSP benefits. What’s more, the Canadian government will provide matching grants for contributions and a bond for low-income beneficiaries.

ODSP benefits terminate at age 65, and payments from an RDSP have to start by the end of the year when a RDSP beneficiary turns 60. So the RDSP can provide an extra income stream between ages 60 and 65 without any loss of ODSP benefits.

Leaving inappropriate gifts

Sometimes someone who wasn’t part of the estate planning will leave a gift to a disabled friend or relative, inadvertently affecting their asset limit.

Luckily, there’s a planning option available to protect ODSP benefits if the inheritance amounts to $100,000 or less. The ODSP regulations exempt up to $100,000 held in a trust from the asset calculation. That income and capital must be available to be used for the recipient’s maintenance.

Be cautious though, as the $100,000 limit applies both when the trust is established and going forward. If the trust starts out with less than $100,000 but grows beyond that, it can mean a loss of ODSP benefits, so it’s best to leave room for growth. If the trust is created after a gift is received, the funds will be counted as income in the month received.

Once an inheritance is in a Henson Trust or an “available to be used” trust, there are more ways to make the most of the money. As noted above, a recipient is entitled to receive a total of $6,000 in any 12-month period from the trust and other acceptable sources “for any purpose.”

But, in addition to the $6,000 amount, the ODSP regulations allow someone to receive an unlimited amount from these sources if it’s used for disability-related items or services that are pre-approved in writing by the Director of ODSP.

There is no fixed list of disability-related items or services. Depending on the nature of the disability, it may be possible to get approval for things such as cleaning or transportation services, a gym membership, or grooming expenses.

The Disability Amount is another means of maximizing the usefulness of a trust. To claim it, the recipient must apply to CRA for approval with a form from their doctor.

If the beneficiary qualifies, the trust can claim a preferred beneficiary election. Normally, income earned and retained in a trust is taxed inside the trust. If income is distributed to a beneficiary in the year it’s earned, it may be taxed in the beneficiary’s hands or inside the trust (it is usually best to get an accountant’s advice on which should pay the tax).

The preferred beneficiary election means the trust keeps the income, but you can still treat it as in the beneficiary’s hands for tax purposes.

Planning for disabled beneficiaries within your estate will require extra time and expertise, but if done properly will afford you the peace of mind that even those who require extra attention will be cared for after you’ve passed on.