What will happen when I'm gone? mother of disabled son worries
How much is enough?
By Gigi Suhanic
Many things have happened to Nancy Costa that she didn't expect -- the decline of the stock markets knocked the steam out of her savings and the health of her disabled adult son has gone into a drastic slide.
"I always assumed there would be enough in my estate. I never dreamed investments would become what they have."
Ms. Costa (not her real name) is over 65 and has a 40-year-old son with mental and physical disabilities who has lived in a government-affiliated group home for the past 10 years. He receives a pension of $11,160 a year from the province.
Ms. Costa half jokes that she was planning on living forever but is suddenly worried about not having put aside enough to care for her son once she is gone.
She asked FP Money for advice on how to leave an estate that will adequately supplement his pension but at the same time not violate government rules that could put that income in jeopardy.
Kenneth Pope, an Ottawa-based lawyer who specializes in advising the families of disabled children, estimates one in every 10 Canadian families is affected by disability.
And it is expected that within the next few years, a wave of Baby Boomers with disabilities, many of whom live with their parents, is expected to flood the social services system as their parents pass away, says Mr. Pope.
Like Ms. Costa, many of them are not wealthy and are starting to save for their disabled children late in life.
Ms. Costa owns her home and has an income of a little under $30,000 a year from an indexed pension, CPP and Old Age Security.
She also has money in a short-term GIC, Canada Savings Bonds and money markets.
Her son's pension goes directly to the group home -- $930 a month. Out of that, the group home allocated $112 to $120 for his spending or "comfort" money. Government rules allow Ms. Costa to supplement this "comfort money" by up to $4,000 a year without the pension being reduced. Any amount is also allowed for disability related expenses such as transportation, medication, footcare and home renovations.
Ms. Costa has made provisions in her will for $70,000 to $100,000 to be directed into an absolute discretionary trust for her son, the amount contingent on the sale of her home and the value of her investment assets.
She has also recently been approved for a $100,000 life insurance policy. But she is wondering if it's the best use for her limited funds since she will have to spend about 10% of her yearly income -- $3,000 -- to pay the premiums.
Ms. Costa's situation is not singular, says Mr. Pope, and "her fears are quite reasonable."
On the bright side, her son is already in a care situation, he says, "which is more than can be said for the many Boomer children still at home due to disabilities." Also, says John Dowson, executive director of Newmarket, Ont.-based LifeTRUST Planning, a firm that offers planning for the families of people with disabilities, Ms. Costa should take solace from the fact that the services her son is receiving through his group home will continue regardless of whether she is there or not.
"The support is dependent on the needs of her son not the size of her estate," says Mr. Dowson. "What her son will miss when she dies is a caring mother, a friend, and the financial support she currently provides to enhance her son's lifestyle," such as providing for new shoes, recreation activities, visits home and special treats, he says.
Toward protecting that quality of life and as a first step, Ms. Costa should develop a "life plan" for her son that would lay out where he will live, with whom, his rights and values, says Mr. Dowson.
She should also write down her intimate knowledge of her son: his likes and dislikes, friends, relatives, religious values and the things she would like his future caregivers to provide. "If she doesn't pass this information on it will die with her," says Mr. Dowson.
Once that is done, she can move on to her financial plan, he says.
The first thing Mr. Pope suggests Ms. Costa do is ensure she is taking advantage of tax provisions that could put up to $2,000 in her pocket or go to paying two-thirds of her insurance premiums.
Mr. Pope typically finds people aren't aware of the federal government's caregiver credit, which can save about $500 per year in taxes. This is on line 315 on her tax return, and Mr. Pope says Ms. Costa qualifies if at any time her son stays with her. She can backfile to 1998 when the credit was introduced.
She can also transfer from her son to herself the "disability tax credit." This has the potential to save her an additional $1,500 a year in taxes. It's possible, says Mr. Pope, to backfile to 1985.
Secondly, Mr. Pope says Ms. Costa should revisit her asset allocation decisions.
"She should consider the possibility of some secure, low MER [management-expense ratio] segregated funds with 100% capital guarantees. These may have the possibility of growth or a better return than CSBs and GICs, with the advantage of being designatable to the trust set up by her will, avoiding probate, legal fees and delay."
Where Ms. Costa's will is concerned, Mr. Pope cautions, and Ms. Costa knows this, that an inheritance would push her son's assets over the $5,000 limit allowed by the Ontario Disability Support Program, meaning he would lose his pension.
"The best solution is a properly prepared 'Henson' trust in her will," says Mr. Pope.
The fund, called a Henson trust in Ontario, is named after Leonard Henson who had a will drafted allowing him to leave his estate to his disabled daughter, Audrey, without jeopardizing her disability pension. The trust is exempt from asset inclusion since it does not legally belong to the beneficiary, Mr. Pope says.
But overall, says Mr. Pope, Ms. Costa's plan for insurance "is her best choice as a savings plan" considering how long it would take to accumulate $100,000 by saving $3,000 per year. Further, the policy can be designated to her son's trust and is exempt from probate -- the process through which a will is verified -- he says.
"She should consider this a form of savings, and if she then is comfortable spending her very conservative income on this, it is a good plan. It replaces the estate itself, and is tax free," he says.
As a caveat, Mr. Pope says Ms. Costa should make sure the policy is a T-100 plan, not a term one that expires when the insured reaches age 75 or 85.
"Many people are not aware of this drawback," he says.
Ms. Costa has a few other ideas she is wondering about such as an inter vivos trust, which is established while the settlor is alive.
Also, she is pondering designating as beneficiary of her insurance policy the charitable organization that cares for her son.
Where the inter vivos trust is concerned, Mr. Pope says "It is likely not suitable in this scenario."
"She doesn't have any excess cash," he says.
Regarding the insurance policy, Mr. Pope and Mr. Dowson say she can name as beneficiary the association caring for her son.
"This makes sense as it reinforces her son's support," says Mr. Dowson. And she would receive a tax deduction because the premiums would be deemed a charitable donation. However, Mr. Pope cautions if Ms. Costa tries to attach strings to the donation for her son's care "the donation fails." She could also make the charity the beneficiary in the year of her death and her estate would receive a tax receipt for the full amount of the policy, says Mr. Pope.
But Mr. Pope and Mr. Dowson say these options don't really help Ms. Costa's son.
Rather, Mr. Dowson and Mr. Pope recommend Ms. Costa set up a charitable remainder trust, as long as the income the policy generates covers her son's income needs.
"The proceeds of the policy are left on deposit with the insurance company as an investment," says Mr. Dowson. Following Ms. Costa's death, her estate receives a tax deduction, but the income from the policy continues to flow into her son's trust until his death. At his passing away, the money goes to the charity. As a further benefit, "There's no encroachment on the [policy's] principal during her son's lifetime," says Mr. Dowson.
With this plan, "everyone wins," he says. "Her son gets income, the charity gets a future gift and her estate gets a credit."
But, Mr. Pope warns families to be sure they consult with a lawyer or advisor who is experienced in setting up this kind of financial arrangement.
At the end of or during the planning process, Mr. Dowson recommends Ms. Costa call a meeting with the people who will be responsible for her son -- the association that runs his group home, the trustee(s), her lawyer and financial planner. "This will ensure that all the people in her son's life are aware of her plans and agree to them," he says.
Any documents pertaining to these arrangements should be gathered together and reviewed annually, he says.
On a more philosophical note, Mr. Pope says: "She should give herself some peace of mind with the thought that she can only do as much as she can, and then try to live as long and happy a life as possible with less stress, because that is what is best for her son."
gsuhanic@nationalpost.com
© Copyright 2003 National Post
The above article initially appeared in the MONEY section of the Financial Post, Saturday, January 11, 2003.
