Tips for giving inheritances to disabled children

By Carol Bezaire | July 5, 2012 | Last updated on September 21, 2023
4 min read

If a disabled client receives an inheritance, it can interfere with federal and provincial social assistance benefits. So you must do special planning to prevent any erosion of benefits, while allowing assets to build for the future.

Consider the example of Jerome and his daughter Fiona in the box below.

Read: Help maximize RDSP carry forwards

Is tax minimization always a priority?

Jerome’s RRIF will be fully taxable in his final income tax return. He could give Fiona the entire $130,000, because as a disabled dependent, she can take the proceeds and transfer them on a tax-deferred basis into:

  • An RRSP or annuity for herself
  • A fully discretionary testamentary trust (if provided for in Jerome’s will). This trust is known as a “Henson” Trust and is recognized in all provinces except Alberta, the Northwest Territories and Nunuvut.
  • A Registered Disability Savings Plan

Saving the estate income tax on the RRIF can allow the three heirs an extra $52,000 ($130,000 x 40%); however, what will this do to Fiona’s lifestyle?

Jerome is a widower, age 74, who is supporting his disabled daughter Fiona, age 43. Jerome wants to provide for Fiona in his estate, in addition to his other children, Mark and Louise.

Jerome’s estate consists of his principal residence ($320,000), Tax-Free Savings Account ($27,500), RRIF ($130,000), a life insurance policy ($100,000 death benefit) and a non-registered investment portfolio ($780,000). The estate value totals $1,357,500.

On an after-tax basis, Jerome’s estate is estimated at $1,228,000. Jerome’s estate plan divides the after-tax estate in three equal portions, meaning that Fiona will inherit ($1,228,000/3) $409,333. (Probate tax has not been factored into the calculation)

Fiona is receiving provincial disability support, which helps her with the rent she pays on her apartment and many health-related expenses. How can Fiona’s inheritance be structured to:

Using the RRSP or buying an annuity

Fiona’s RRSP can accept Jerome’s RRIF proceeds on a tax-deferred basis. Trouble is, the RRSP assets will most likely eliminate Fiona’s social benefits until the RRSP funds are used up. The RRSP value, as well as any income drawn by Fiona, are not considered exempt assets, so her benefits will be clawed back. This will likely put Fiona on the hook for her rent and health-care costs.

Therefore, an RRSP is not a good choice. If the RRIF proceeds from Jerome are not transferred to Fiona’s RRSP but instead are used to purchase an annuity on a tax-deferred basis, the income will be taxable in Fiona’s hands and likely erode her social benefits.

Read: Planning for disabilities

Using a Henson Trust

Jerome can also create a Henson trust for Fiona to accept the RRIF proceeds on a tax-deferred basis. If Jerome has named trustee(s) to oversee the assets on Fiona’s behalf in his will, then the assets will be exempt from social benefit clawback.

A Henson Trust makes sense if Fiona inherits more than $200,000 from Jerome. It’s a good idea to direct the proceeds of the life insurance policy to Fiona’s trust as well. The RRIF proceeds plus the life insurance proceeds ($230,000) in total can form a little more than 50% of Fiona’s inheritance.

The balance of Fiona’s inheritance can also be deposited to the trust – there is no maximum amount. The trustees can pay disability-related expenses on behalf of Fiona. The income from the trust, however, is not exempt for social benefits purposes, so the trustees must monitor the amount of income that flows to Fiona each year. In addition, as mentioned above, this trust is not recognized in all jurisdictions.

Using an RDSP

The same tax-deferral opportunity is permitted if Jerome’s RRIF proceeds are transferred on a tax-deferral into an RDSP for Fiona. This is a new opportunity as a result of recent changes to RDSPs.

Read: Feds improve, streamline RDSP

Fiona may hold this account herself, or, if she is not legally competent, someone other than Fiona can hold it. In either case, the RDSP can accept the $130,000 in RRIF proceeds. As a result of the tax-deferred transfer, no tax implications will apply at the time of the transfer.

Unfortunately, the contribution will not qualify for any government matching grants or bonds. However, a payment schedule can begin immediately for Fiona (known as a Lifetime Disability Assistance Payment). The assets and the income are exempt or partially exempt from income-tested social benefits, depending on the jurisdiction in which Fiona resides. Other assets from the estate can also be contributed to the RDSP, but there is a maximum contribution limit of $200,000.

Lifestyle is a Priority

In determining the method that would best suit Fiona’s needs, look at all factors, including government benefits. Jerome needs customized advice if he wants to ensure that Fiona’s lifestyle is not disrupted upon his death. Working with Jerome and including, when possible, Fiona and her siblings, will ensure your advice will address the special needs planning for both generations. As mentioned, the above options will vary by jurisdiction.

Carol Bezaire

Carol Bezaire , PFPC, TEP, CLU, is the vice-president of tax and estate planning at Mackenzie Investments. Carol can be contacted at: