Preserving Your Child’s Inheritance


Including a Henson Trust in Your Will

Jason had been in and out of psychiatric hospitals for much of his adult life. Sometimes he would be balanced and able to work for months. Then he would slip into a severe depression. At the age of 35, Jason was diagnosed with manic depression.

Although still fit, Jason’s parents worried about what would happen once their only child didn’t have them to depend on any longer — emotionally or financially. They wanted to make a provision in their will that would do as much as possible for Jason.

But parents who have a child with special needs face a dilemma other parents never have to deal with: Without special arrangements, any inheritance they leave as an asset in their child’s hands will be offset against any social assistance that he or she receives.

Some parents have tried to create their own options to protect the inheritance. For example, they place the money in the hands of a trusted family member or friend, in a “secret trust.” Such an arrangement leaves the beneficiary with no recourse if the trustee goes bankrupt or loses the money through divorce or bad financial management. And, if the arrangement is discovered, the province can take legal action to obtain access to the money on behalf of the person with a disability to offset support payments.

But there are two legal solutions to this problem, neither of which is generally well known.

The first recourse is necessary if no planning has gone into the parent’s will. A special disability trust is set up with provincial approval and monitoring (in Ontario it would be under Family Benefit Allowance, or FBA), when no provision is made in the parent’s will. This is a partial solution, and better than losing the entire inheritance.

The second, called a Henson trust, is created by the parent’s will. It is the best avenue open to parents of children with disabilities. This absolute discretionary trust places estate assets in the hands of a trustee, selected by the parent, who administers it for the beneficiary.

In both cases, the trustee can disburse funds from the trust for disability-related supports and services for the recipient, just as the parents could while they were alive. In addition, a beneficiary can receive small comforts such as spending money, a radio, record player or television set, personal clothing, extra food, recreation, entertainment and vacations.

Although the Henson trust is Ontario case law, people in other provinces should use the same form of trust because it will be at the least persuasive in their own province, and would be very likely to be upheld if brought to their own provincial court for interpretation.

Compared to a Henson trust, there are clear disadvantages of an FBA trust:

– While the FBA trust is presently allowed (since 1993), it could quickly be removed by a change to the regulations of the FBA. In Ontario, a review of allowable disabilities and social support payments is now going on.

– The FBA trust is created by the beneficiary who receives the inheritance, with Ministry approval, rather than by the parents in their will. Depending on the abilities and competency of the beneficiary, this may pose problems.

– The FBA trust is limited to $65,000, which may be less than the estate left to the child. The remainder is used to offset FBA directly until it is all gone. This limit may be increased at some time, but this will likely go hand-in-hand with a requirement that more of the estate money be used to offset FBA payments.

– The FBA trust fund is intended to be exhausted during the beneficiary’s lifetime. Funds left in a Henson trust are generally left to the siblings or children of the beneficiary when he or she dies.

– Income earned by the funds in an FBA trust that are not paid out to the beneficiary are deemed to be received anyway, and offset against FBA payments. This does not happen with a Henson trust.

– Income in an FBA trust not paid out may be taxed at the maximum marginal rate (50 per cent) on every dollar, while Henson trust income that accumulates is taxed at low and increasing marginal rates, like income for any other taxpayer.

– The costs and administration involved in setting up an FBA trust after the fact can easily be greater than the cost of simply planning properly in the first place, while a parent’s will is being prepared.

For these reasons, it’s important that Henson trust arrangements be made as part of estate planning at the time the will is drawn up. By being explicit and including the trust in their will, parents can ensure that their wishes will be respected, no matter what happens later.

The choice of trustee is a critical factor in making the plan work. The trustee should be someone who is financially capable, fair-minded and who has the beneficiary’s best interests at heart.

It is common for siblings to be appointed as trustees, although there is potential for conflict of interest. This can be resolved by appointing joint trustees, such as the combination of a sibling and a family friend. A plan for alternates as time goes by deals with the concern about a beneficiary outliving their trustee.

Before making a decision to incorporate a Henson trust into their wills, parents should review these key considerations:

– If their child is likely to be a permanent recipient of Family Benefits, will he or she have needs or wants beyond what will be received under this plan?

– What will be the size of the parents’ estate, and the portion going to this child?

– What are the needs of other beneficiaries?

– Is the child likely to be disqualified from Family Benefits in future because he or she will be employed or because of legislative changes?

– Is there a possibility that the child will be considered dependent under the relevant legislation, even as an adult? If so, leaving the child out of the will entirely would invite an application to the courts for dependents’ relief (Part V of the Succession Law Reform Action in Ontario). This will tie up the whole estate and generate substantial legal costs. Such an action would almost certainly be successful, with the estate funds being paid into Court and administered by the Public Trustee and Guardian.

Specialized legal counsel is the best insurance that estate arrangements will give you peace of mind and a dependable plan that will work for the whole family. A lawyer who specializes in this field can properly advise you and make provision for such a trust in your will to plan for the ongoing needs of your child.

(Kenneth C. Pope is a barrister and solicitor practising in Ottawa, Ontario. He can be reached at (613) 567-8230.)


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