Beyond the Henson Trust: Estate Planning for Children with Disabilities

Trust advisors often encounter clients who have a child with a disability ask during estate planning meetings: “Should I have a Henson Trust?” They have inevitably heard somewhere that a Henson Trust is the must have in their situation. Unfortunately, this can create ad hoc estate planning: picking out solutions without fully analyzing the situation.

For those who are not familiar with Henson Trusts, this is the name commonly given to trusts where the Trustee has full discretion over the payments made out of the trust. These trusts are typically set up for beneficiaries who are or may be in receipt of asset and income tested government disability support benefits. Because the assets sit in a trust and the beneficiary does not have a fixed income stream from the trust, these assets do not affect entitlement to government benefits.

However, Henson Trusts are complex and must be administered properly in order to preserve government benefits. They may not be the best, or only, solution in every case.

Other excellent planning tools may include:

• Qualified Disability Trusts (QDT): These are trusts that offer tax benefits for the beneficiary, by using a graduated tax rate on trust income. There are strict set-up and ongoing requirements for these trusts.
• Lifetime Benefit Trusts (LBT): These trusts allow for RRSP or RRIF account proceeds to rollover into the trust tax-free. The proceeds are then used to purchase a qualifying annuity which pays out into the trust. Again, certain requirements must be met.
• Trusts with multiple beneficiaries: It could be valuable to have other individuals, such as the disabled child’s spouse, children, siblings or charities, as additional beneficiaries to a trust depending on the client’s estate plan. Henson Trusts can actually have multiple beneficiaries, even though this is not often done in practice.
• Registered Disability Savings Program (RDSP) accounts: These are savings accounts for persons with disabilities. Contributions made to the account may be matched with government grants and the funds inside the account can grow tax-deferred.

It is also vital to choose the right Trustee to manage the trusts in a way that maximizes the benefit to the beneficiary and complies with legal requirements. Strong consideration should be given to using a professional trustee in these circumstances.

The key takeaway, as is often the case, is to avoid cookie-cutter solutions when planning for children with disabilities. It is important to work with a trusted estate planner who will look at the whole situation and create a custom solution that works best for the client and their loved ones.