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Kenneth C. Pope, Henson Trust Specialist

Special needs planning

Are you prepared to help clients who have children with disabilities prepare for their child's future?

When it comes to leaving money to children with disabilities, parents face a major roadblock: many financial advisors and lawyers don’t know what the best options are, which can make it difficult to get good advice.

"Most planners and lawyers are not very well-advised on this subject," says Kenneth Pope, an Ottawa lawyer who specializes in estate planning for parents of children with disabilities. The scarcity of knowledge surprises and dismays him, considering the sizable number of Canadians with disabilities. Pope estimates that at least one in every 10 Canadian families are affected by disability.

Part of the problem, he speculates, is that many of these families have very ordinary incomes. For some advisors, the market may not seem lucrative enough to merit the work involved in becoming familiar with all the options, which can seem quite complex at first.

Compounding the problem is the fact that so may parents are unaware of what they might gain by seeking out specialized help – or what they stand to lose if they don’t.

"It’s similar to how only 50 per cent of the population has a Will," says Pope. "People often don’t foresee the consequences of not planning properly."

This is why John Dowson, executive director of LifeTRUST Planning, a Newmarket, Ont.-based firm that offers total life planning for families of children with disabilities, recommends that advisors ask new clients whether or not they have a child with a disability.

"It should be one of the first questions you ask," he says. "You can't deal with anything else properly unless you've figured that out first."

Suppose a new client does tell you they need to plan for a child with a disability. What are the issues, and how can you help?

The most complex matter is ensuring that the money your client leaves behind won’t interfere with the child’s government benefits.

All Canadians with disabilities are entitled to support payments from the government. In Ontario, this support is known as ODSP (Ontario Disability Support Payments). The trouble is that by law, a person with disabilities must be deemed to be living in poverty in order to qualify for support – a person receiving benefits cannot own more than $5,000 in liquid assets. Therefore, if a parent plans to Will the child a substantial sum of money, there is the danger that the inheritance will disqualify the child from receiving government benefits.

"The government says, 'Oh, you inherited $100,000? Well, when it’s all gone, come back and talk to us,'" explains Pope.

The challenge for you, therefore, is to devise a way for parents to leave money to their child without diminishing – possibly eliminating – government benefits.

KNOWING THE OPTIONS

The best tactic by far for virtually every client, say both Dowson and Pope, is what’s known as an absolute discretionary trust. Known in Ontario as a Henson Trust, this is a trust that is worded so that a child with disabilities is deemed not to have personally received the inheritance. The wording of the trust is of paramount importance, says Dowson. It must stipulate very specifically that the funds are not in the name of the child.

"The child has a life interest in the assets of the trust, but does not own them," he says. Or, in Pope's words, "the child has no control over – and no ownership of – the assets."

If the child is considered not to personally own the assets, then he or she can continue to receive full government benefits. Meanwhile, the designated trustee can pay out the trust assets for the benefit of the child at his or her discretion. There is no limit to how much can be left to the trust by the Will, or by directed insurance proceeds.

Although an absolute discretionary trust is the most effective way for parents to ensure their child is properly cared for after their death, not everybody knows about this option, says Dowson. Some people are still using the Disability Expenses Trust, which in Ontario allows the child to inherit up to $100,000 without penalty.

This might seem adequate at first glance, but $100,000 doesn’t go far, particularly if the child is still young when he or she inherits it. Also, this kind of trust stipulates that funds can be used only for expenses directly related to the child’s disability, such as specialized medical care or a wheelchair.

Some parents who don’t know about Absolute Discretionary Trusts may still be trying to get around the problem. For instance, some parents opt to designate multiple beneficiaries, then appoint a trustee who knows the mandate of the trust and who will actually dispense all of the money to a child with disabilities.

Dowson frowns on this idea. "It’s too transparent – it’s like having a 'secret' trust," he says. "The government can discover that kind of arrangement fairly easily."

Pope says many planners, lawyers and parents are unaware of the benefits of an absolute discretionary trust.

"The Henson Trust is a pure and powerful idea," he says. "It’s a work of beauty. All it requires is that the control of the money is completely out of the hands of the beneficiary."

What about parents who want to plan for their child’s future, but have been unable to save enough money to leave behind?

In that case, life insurance is an effective alternative.

SAD BUT TRUE

"Not having enough money to leave a substantial estate to a disabled child is quite common," says Dowson. "More than half of children with disabilities are in families that don’t have a lot of money."

As with an accumulated sum of money, an insurance policy can be paid into an absolute discretionary trust for the child.

When talking to parents of children with disabilities, don't be afraid to discuss the personal aspects of planning as well, advises Dowson. For instance, clients may want your input on how to choose a trustee. In that case, he says, advise them to look for someone who knows the child well and is a good manager of assets.

Taking care of a child with a disability can be an enormous, emotional responsibility, especially if there are concerns about their child's long-term financial security. But with your expertise and guidance, you can put your clients' minds at ease and ensure their child has a secure financial future.

What is a Henson Trust?

The Henson Trust is an absolute discretionary trust named after Leonard Henson, a Guelph, Ontario parent who was trying to provide for his daughter with disabilities, Audrey, more than a decade ago. His lawyer George Goetz (now retired), drafted a Will that arranged for Audrey to receive Henson’s estate through an absolute discretionary trust – an arrangement by which she could receive the estate without reducing or losing her government benefits, since the trust stipulated that she should not own assets.

The Will was challenged by the Ontario Social Services Ministry, but it was ultimately approved by the Ontario Court of Appeal in 1989.

THE BOTTOM LINE

Few parents are aware of the options when it comes to providing for their disabled children in their Wills. Here are some tips:

 

The above article initially appeared in the June 2001 edition of TD Planner Magazine, a guide for financial advisors.