Across Ontario, numerous families provide support to adult children who are unable achieve financial independence due to a disability, mental health or other issues. There are estate planning tools that address the concern of providing on-going support for dependant adult children after the death of the supporting parent.
Dependant adults are often entitled to public benefits, such as disability benefits under the Ontario Disability Support Program (ODSP). They will be disentitled if they have or acquire income or assets beyond the program’s limits. For example, ODSP benefits are currently available to recipients with less than $5,000 in assets. Such asset and income restrictions are problematic from an estate planning perspective. When a dependent adult gains an interest in an estate, he or she may lose access to public benefits (often including extended health and prescription drug benefits). Additionally, while an inheritance may disqualify a dependant adult child from receiving public benefits, the estate may be too small to provide security for the dependant’s future needs.
One potential solution for parents of dependant adult children is the use of a discretionary trust, also known as a “Henson Trust” . The purpose of a Henson Trust is to maximize the total benefit to the dependant adult child by making available money held in trust, while still preserving the entitlement to public benefits.
How does a Henson Trust work?
The dependant adult child is the beneficiary of the trust, however he or she does not have direct ownership or access to the trust. The trustee, often a relative or trusted family friend, has complete control over the trust. The trustee ensures that the beneficiary is not disqualified from receiving public benefits by limiting the payments out of the trust. The Henson Trust does not affect the beneficiary’s entitlement to benefits because he or she will not inherit the assets in the trust directly and can never compel the trustee to provide direct access to the trust.
Features of a Henson Trust
The essential features of a Henson Trust are:
- The trustee has absolute discretion over payments from the trust.
- This includes the power to decide both how much to pay and whether to pay at all.
- The trustee of a valid Henson Trust decides to how to apply the trust, to generate the maximum benefit to the dependant. This is often some combination of cash, services and goods.
- No interest must ever vest in the beneficiary and any capital remaining after her lifetime must vest elsewhere. This means that the dependant adult must never have absolute ownership of the assets of the trust. After the death of the dependant, the assets will not form part of his or her estate.
- The dependant adult must have no enforceable, beneficial interest in the trust and no ability to compel the trustee to make payments from the fund. Since the dependant adult does not directly “own” the assets, the assets that form the Henson Trust do not affect his or her eligibility for public benefits.
- Trustees must ensure payments out of a Henson Trust must not increase the dependant adult’s assets or income above the prescribed limit for benefit eligibility. Under the ODSP Act, assets include anything that can be sold and that is not specifically excluded by the regulations.
- To avoid inadvertently increasing the dependant’s assets, payments should be made directly to those who are providing the goods or services.
Who Should Consider a Henson Trust?
A Henson Trust can be a useful option for providing financial security for a dependent adult child, but it is only appropriate in limited circumstances.
The dependent adult must be eligible to receive public benefits.
A Henson Trust is of little use where the dependant adult already has significant assets and does not qualify for public assistance. It may also be worthwhile to create a Henson Trust for the dependent adult who has assets in excess of the prescribed limit, if these are likely to be depleted by day to day costs of living in the future.
The dependant adult would require public benefits after inheriting the estate.
A Henson Trust may be inappropriate where the size of the inheritance is far greater than the total public benefits that the dependant adult can expect to receive during his or her lifetime. A Henson Trust usually affords a standard of living that is somewhat better than that available by public benefits alone. If the inheritance is significant enough to provide for a more comfortable existence over the lifetime of the dependant adult, then it may be better to consider alternative arrangements.
The Henson Trust would be worth more than the exemption provided by the ODSP Act.
The ODSP Act provides an exemption for trusts under $100,000, where the capital is derived from inheritance. There is no need to use a Henson Trust in this case because the dependant adult’s interest in such a trust would not disqualify him or her from receiving ODSP benefits. Other public benefit schemes may have similar exceptions.
The dependant adult child’s circumstances.
Some dependant adult children may require a great deal of assistance managing finances and may benefit from a Henson Trust. Others may be partially independent or able to manage their own financial affairs and may benefit from greater control over inherited assets.
Consider the following hypothetical situation:
Aaron’s 45 year-old daughter, Betty, receives ODSP benefits because she unable to work due to physical disabilities. Aaron provides financial support to Betty because the benefits she receives do not cover all of her expenses. Betty relies on Aaron’s financial support for pain therapy not covered by health benefits. Aaron drives Betty to therapy twice a week, but when he cannot he pays for her return cab fare. Aaron has an estate worth $300,000 and he wants to divide his estate equally between Betty and his son, Bob. Aaron may want to consider providing a Henson Trust for Betty because:
- Betty is unable to work and is entitled to public benefits.
- Betty’s benefits entitlement does not meet all of her expenses and she requires additional support from Aaron;
- Aaron wants to provide Betty with $150,000, which exceeds ODSP’s trust exemption, but it is not enough to provide for Betty’s expenses for the rest of her life.
Consult a lawyer
Whether or not a Henson Trust is appropriate will depend on each family’s specific circumstances and particular estate planning goals. In order to determine whether a Henson Trust may be appropriate for you, please consult a lawyer.
Please note that this article is intended for information and general reference only and does not contain legal advice. If you require legal advice please visit here for more information.