Families with Special Needs - Children with Disabilities: The Dilemma of Inheritance and the Dependent Child
Parents who have a child with special needs -- whether physical, developmental or psychological difficulties -- face a dilemma other parents never will.
Question:
My husband died
recently, and I am now left on my own to care for my son, who is
developmentally delayed. He is, in fact, fully grown but he is not
able to live on his own. He receives provincial disability benefits
each month of $708, which would not be enough to live by himself
even if he were able to do so. I understand that if I leave any
money for his care when I pass on that he will then lose the small
amount of financial support he now receives. I am no longer young
myself and I am increasingly concerned about what will happen to my
child when I'm gone? What can I do now to provide for him later?
P. W. , Kingston
Answer:
by Kenneth C. Pope, Barrister & Solicitor, Ottawa 1-613-567-8230
Dear P.W. My legal practice, with clients all over Ontario and Quebec, is primarily directed to dealing with exactly this fear. In the Kingston/Frontenac County area there are 4,000 people receiving disability benefits. In Ottawa-Carleton there are 13,000 benefit recipients. Their parents share your concern. You are not alone, and there is a solution available which relatively few people know about.
Parents who have a child with special needs - whether physical, developmental or psychological difficulties - face a dilemma other parents never will.
Without special arrangements, any inheritance you leave is an asset in your child's hands, will be offset against any social assistance that he receives, and will disqualify him for medical coverage, home care, life skills training, transportation services and all other supports.
Some parents have tried to create their own options to protect the inheritance. For example, placing 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 disabled person to offset ODSP payments.
I have reviewed many wills with standard type trusts, which the parents think will protect their child. Their executor will find out too late that this is not the case, and there will be little they can do to correct the situation 'post mortem'. In my experience, far more than 80% of the wills I review are unworkable in practice. The parents are blithely unaware of the problems that will occur after their death.
There are two legal solutions to this problem, the better one being the creation of a 'Henson' trust in your will. This type of trust is specifically different from standard trust arrangements and is a specialized area of law.
The first, a partial solution, is useful as a stop gap recourse if no planning has gone into the parent's will. A disability trust, to be set up with ODSP approval and monitoring when no provision is made in the parent's will, is a partial solution which is 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 special beneficiary, and this trust arrangement has no reporting or spending limitation.
In both cases the trustee can disburse funds from the trust for disability related supports and services for the recipient, just as the parents can while they are alive. Unfortunately, a beneficiary of any trust other than a 'Henson' trust can only receive small comforts, such as occasional gifts of spending money, within certain financial limitations.
The chief disadvantages of an ODSP trust, compared to a Henson trust, are the following:
- While the ODSP trust is presently allowed (since 1993) it could quickly be removed by a change to the regulations. A Henson trust is allowed by a Court of Appeal of Ontario decision in 1989. It can only be over-turned by a separate and clear Act of the Ontario legislature, which is extremely unlikely.
- The ODSP trust is created by the beneficiary who receives the inheritance, with Ministry approval. Depending on the abilities and competency of the beneficiary, this may pose problems. Many beneficiaries are open to manipulation by friends and associates. A Henson trust appoints a trustee selected by the parent, is completely above any legal attack, and cannot be abused by 'friends' of the beneficiary.
- The ODSP trust is limited to a lifetime amount, including interest and gains over the years, of $100,000, which may be less than the estate left to the child. The remainder would be used to directly offset ODSP 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 ODSP payments. A Henson trust has no financial limit or restriction on payments or benefits. It can include a house plus sufficient life insurance proceeds to maintain the house plus lifetime support and care for a family member.
- The ODSP 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 dies, or to a charity. Income earned by the funds in an ODSP trust which are not paid out to the beneficiary are deemed to be received anyway and offset against ODSP payments, except for a modest annual allowance. This does not happen with a Henson trust.
- Income in an ODSP trust not paid out may be taxed at the maximum marginal rate (50%) on every dollar. Henson trust income which accumulates is taxed at low and increasing marginal rates like every other tax payer.
- The costs and administration involved in setting up an ODSP trust after the fact can easily be greater than the cost of simply planning properly in the first place when 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 same 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 a 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 other 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.
Key Considerations:
If their child is likely to be a permanent recipient of Disability Benefits, will he or she have needs or wants beyond what they can receive under this plan? Usually supplementary support is needed.
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 ODSP 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.
RRIFs AND ADULT CHILDREN WITH DISABILITIES
Many parents believe their RRIF can roll over to their dependent adult child. In practice this is rarely the case, unless the child will be independently wealthy after the parent's death, and was being solely supported by the parent in the year prior to death. This is an uncommon, but not nonexistent, scenario.
A rollover of a RRIF to a disabled child renders that child ineligible for provincial disability benefits. The family's view of their disabled child's "dependence" is not the same definition of dependence used by Revenue Canada. To Revenue Canada, "dependence" means receipt of an income amount (taxable or not) less than the personal exemption level ($6,456 in 1998) in the year prior to death.
Anyone in receipt of Ontario Disability Support Programme (ODSP) benefits, ($8,496 or 11,160 each year) receives more than the personal exemption, so is not considered "financially dependent" by Revenue Canada, no matter how dependent that child may otherwise be on the parents.
(Incidentally, benefits are often paid in the wrong amount, and can often be increased from $730 to $959 per month if you understand how the rules are supposed to be applied! This results in an additional $229 per month into the household income, a welcome and often critical amount. This can be done especially in cases where the child has a physical or psychological difficulty and is living at home with parents.)
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.
The above article initially appeared in the March/April 2000 edition of Fifty-Five Plus Magazine.
