Protecting a Beneficiary With a Disability
For parents of children with disabilities, estate planning often raises an important question: how can they provide financial security for their child after they are gone without jeopardizing the government benefits their child relies upon?
In Ontario, individuals receiving benefits through the Ontario Disability Support Program (ODSP) are subject to financial eligibility requirements.
An inheritance received directly by an ODSP recipient may affect their entitlement to benefits if it causes them to exceed the applicable asset limits or otherwise fails to qualify for an exemption.
Fortunately, Ontario estate law offers a planning tool designed to address this concern: the Henson Trust.
What Is a Henson Trust?
A Henson Trust is a special type of discretionary trust established for the benefit of a person with a disability.
Rather than leaving an inheritance directly to the beneficiary, the person creating the trust appoints a trustee to manage the funds on the beneficiary's behalf.
The defining feature of a Henson Trust is that the trustee has absolute discretion over whether, when, and how much money should be distributed to the beneficiary.
The beneficiary cannot demand payments or compel the trustee to distribute the trust's assets.
This distinction is extremely important.
Because the beneficiary does not have an enforceable right to receive the trust property, the capital of a properly structured Henson Trust is generally not considered an asset when determining eligibility for ODSP.
As a result, a Henson Trust can allow families to provide additional financial support without necessarily compromising the beneficiary's government assistance.
Where Does the Name Come From?
Henson Trusts take their name from the Ontario case Ontario (Director of Income Maintenance) v. Henson, decided in the late 1980s.
The case concerned a trust established for a beneficiary with a disability.
The central issue was whether the trust property should be treated as an asset belonging to the beneficiary when assessing eligibility for social assistance.
The courts recognized that because the trustee possessed absolute discretion over distributions, the beneficiary could not compel payment of the trust funds.
Consequently, the trust property was not treated as an available asset for the purposes of the applicable social assistance rules.
The decision established an important foundation for disability-focused estate planning in Ontario.
How Does a Henson Trust Work?
Consider a hypothetical example.
A mother has two adult children. One is financially independent, while the other has a disability and receives ODSP benefits.
The mother wishes to leave $200,000 to each child.
Leaving $200,000 directly to the child receiving ODSP could create significant difficulties with benefit eligibility.
Instead, the mother establishes a Henson Trust through her Will.
Upon her death, the child's $200,000 inheritance is transferred to a trustee, who manages and invests the funds for the child's benefit.
The trustee may use the money to improve the beneficiary's quality of life, subject to the trust's terms and the applicable ODSP rules.
For example, trust funds might help pay for recreational activities, additional personal care, education, transportation, or other needs.
The trustee determines when distributions are appropriate and how they should be made.
The beneficiary receives the benefit of the trust without having an automatic right to demand its capital.
Does a Henson Trust Have a Maximum Value?
One significant advantage of a properly structured Henson Trust is that there is no prescribed maximum capital value for ODSP asset-exemption purposes.
This distinguishes it from certain other trusts that may qualify for more limited exemptions.
Under Ontario's ODSP rules, some inheritance-funded trusts are subject to a $100,000 asset exemption.
However, a genuine absolute discretionary Henson Trust is treated differently.
Its capital may exceed $100,000 without automatically becoming a countable asset for ODSP eligibility.
Nevertheless, the trust must be carefully drafted to ensure that it genuinely provides the trustee with the necessary discretion.
Simply calling a document a "Henson Trust" does not guarantee that it will qualify.
Can the Trustee Give Money to the Beneficiary?
Yes.
However, the treatment of distributions requires careful attention.
Although the capital held within a properly structured Henson Trust is generally exempt as an asset for ODSP purposes, payments made from the trust may be treated as income.
Under the applicable ODSP rules, up to $10,000 in qualifying gifts, voluntary payments, and trust distributions may generally be exempt in a twelve-month period, subject to a combined limit.
Certain additional payments may qualify for exemptions, including those used for approved disability-related expenses, specified housing costs, or contributions to a Registered Disability Savings Plan (RDSP).
Other payments may affect the beneficiary's benefits.
Accordingly, trustees should understand the applicable rules before making distributions and maintain accurate records of all transactions.
Choosing the Right Trustee
Selecting the trustee is one of the most important decisions when establishing a Henson Trust.
The trustee may be responsible for managing the trust for many years, potentially throughout the beneficiary's lifetime.
Ideally, the trustee should be someone who:
Understands the beneficiary's needs and circumstances.
Is financially responsible and capable of managing investments.
Is willing to exercise independent judgment.
Understands the importance of preserving government benefit eligibility.
Can maintain accurate records and communicate appropriately with the beneficiary and relevant authorities.
Parents sometimes appoint another child or trusted family member.
In other circumstances, a professional trustee may be appropriate.
It is also important to consider successor trustees in case the original trustee dies, becomes incapable, or is unwilling to continue acting.
Can Someone Create a Henson Trust After Receiving an Inheritance?
This is an important distinction.
A Henson Trust is generally most effective when established by someone other than the beneficiary, often through a parent's Will.
An ODSP recipient who has already received an inheritance cannot simply transfer those funds into a trust under their own control and expect the funds to receive the same treatment.
Different planning options may be available for individuals who have already inherited money, including certain exempt trusts, RDSP contributions, or other permitted uses of inherited funds.
However, these arrangements are subject to different requirements and limitations.
For this reason, families should ideally consider disability-related estate planning before the inheritance is distributed.
What Happens When the Beneficiary Dies?
A Henson Trust should also specify what happens to any remaining trust property when the beneficiary dies.
For example, parents might direct that the remaining funds be distributed among their other children, grandchildren, or a charitable organization.
These individuals or organizations are sometimes referred to as remainder beneficiaries.
Clearly identifying them helps ensure that the trust property is ultimately distributed according to the wishes of the person who established the trust.
Final Thoughts
For families supporting a loved one with a disability, estate planning involves more than simply deciding who receives an inheritance.
It requires considering how that inheritance may affect the beneficiary's long-term financial security, independence, and access to essential government benefits.
A properly structured Henson Trust can provide an effective way to supplement a beneficiary's resources while preserving eligibility for ODSP.
However, the trust must be carefully drafted, the trustee must be appropriately selected, and distributions must be managed with an understanding of the applicable rules.
With thoughtful planning, a Henson Trust can provide both financial protection and peace of mind for families concerned about the future of a loved one with a disability.
If you are considering establishing a Henson Trust or have questions about protecting an inheritance for a beneficiary with a disability, Tonelli Estate Law would be pleased to assist - BOOK A FREE CONSULT TODAY.
This article is for general informational purposes only and does not constitute legal advice.
