A properly structured trust is the most flexible and effective means of ensuring that a disabled child will be taken care of throughout their life. There are three parties to a trust – the settlor or the person who sets up and contributes to the trust, the beneficiary for whom the trust is established, and the trustee who manages the trust.
As a general rule, any one person can play any two of the three roles. However, if you are concerned about the ongoing welfare of your disabled child you will likely be considering the support of your child after you are gone. Therefore, although you will be the settlor and perhaps the trustee while you are alive you will want to name a trustee when you are deceased.
These are trusts that are established while the settlor is alive. As mentioned above, this would be an option while you are alive but plans would have to be made for the ongoing welfare of your child.
These are trusts that will come into existence upon your death. If you are concerned about the welfare of your child after your death you will need to make arrangements to ensure a testamentary trust comes into existence upon your death.
Establishing a legal trust is a very effective way of looking after a disabled child after the parents have passed away. As explained above, the trust is provided with funds from the parent (or settlor in legal terms) and the trustee is required to use those funds in the best interests of the child on an ongoing basis subject to the specific instructions of the settlor through the trust indenture.
An ordinary trust will certainly meet those objectives but a further consideration is governmental support for the disabled person.
There are various sources of provincial support for disabled persons but in many cases they are income tested. An example is the Ontario Disability Support Program (ODSP) which provides financial support for disabled persons. The Program is income and asset tested whereby eligibility for benefits is related to the income and assets of the disabled person.
Ordinarily inheritances and or insurance proceeds over $100,000 received by a disabled person would directly affect the Ontario Disability Support Program Act (ODSPA) benefits.
However, if a ‘Henson Trust' is established any additional income received by the disabled person will not affect the ODSPA benefits. Currently Henson Trusts can be established in Ontario, British Columbia, Saskatchewan, Manitoba, New Brunswick, Nova Scotia and PEI.
As mentioned above, trusts can be a very flexible and efficient way to provide for a disabled child but you need competent legal counsel to ensure that the trust is legally structured in a way that achieves your goals.
If you are anticipating having RRSP/RRIF assets when you die and would like these funds to be transferred to a disabled dependent there are tax rules that will minimize the tax effect. Ordinarily, RRSP/RRIF assets will be included in your estate's taxable income on death unless the assets are rolled over to a spouse. However, this money can also be ‘rolled over' tax free to an RRSP of a minor dependent child or to a child who is financially dependent on you due to a disability. To make the tax-free rollover the proper tax form must be filed. Your advisor can provide more information on how to tax efficiently transfer assets to your disabled child.