Planning with parents of disabled children
If you’re like most advisors, estate planning for clients with disabled children is a legal minefield around which you’ve managed to steer clear. But demographics alone suggest that advisors need to prepare for some difficult questions from clients in need
By Gordon Powers
For the first time in history, people with disabilities are outliving their caregivers in unprecedented numbers. Within the next few years, a wave of adults with disabilities, many of whom still live with their parents, is expected to flood the social services system as these parents pass away – to say nothing of those families only beginning to struggle with the needs of a disabled child.
According to Kenneth Pope, an Ottawa, Ont. lawyer who specializes in estate planning for parents of disabled children, surprisingly few advisors are familiar with the correct estate planning options available for clients whose children are disabled. The paucity of knowledge continues to surprise him, given the numbers: he estimates that at least one in 10 Canadian families is affected by a disability – in other words, a significant portion of most advisors’ books.
Pope speculates that part of the problem is that many such families have fairly ordinary incomes and are starting to save for their disabled children later in life. As a result, many advisors may not see the market as attractive enough to merit becoming familiar with the complex options involved. “Disability respects neither income nor assets,” he says. “But that doesn’t necessary mean that clients won’t have them. There is a business case here, over and above the opportunity to be of service.”
So much so, says John Dowson, executive director of LifeTRUST Planning, a Newmarket, Ont.-based firm that offers total life planning for families with disabled children, that advisors should automatically ask new clients upfront whether or not they have a child with a disability.
“The overriding question for parents of a disabled child is ‘What will happen to my child after I’m gone?’” says Dowson. “Once an advisor discovers that a client has a child with a disability, the primary objective should be to solve that particular problem. For these people, there is no bigger priority.” Plus, you’ll have a grateful client for life that will sing your praises far and wide, he adds.
Dowson himself had to learn the hard way after being asked to look after his disabled niece following his sister’s death several years ago. “That was a real eye opener and I’d already spent 20 years in the insurance business,” he says.
Planning for this growing segment is not easy though, says Susan St. Amand, president of Sirius Financial Services in Ottawa. “You're not talking about the traditional money magazine profile where they buy a house, have the children, and plan for their education,” she notes. “And forget about an estate plan that neatly provides equal inheritances for all the couple's children. The special needs child will need a bigger share of assets – and that always seems to get fairly complicated.”
Parents who are well off and can save a substantial amount of money to leave to their children have several estate planning options, the most appropriate of which is usually an absolute discretionary trust, she explains. For parents who can’t put as much aside, life insurance is clearly the next route. Premiums on joint and last to die policies are more modest and the benefits can be paid into an absolute discretionary trust for the child with no immediate tax consequences.
In some instances, clients may choose to name the organization caring for their child as beneficiary of any policies, enjoying some tax relief because the premiums would be deemed a charitable donation. Following the client’s death, the estate receives a tax deduction, but the income from the policy continues to flow into the child’s trust. Upon his or her death, the money goes to the charity.
Pope also says advisors should become more familiar with the tax breaks available to parents of disabled children, such as the opportunity to deduct disability-related expenses like medical and respite care. Typically, he 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 the tax return, and clients can backfile to 1998 when the credit was introduced. Clients can often also transfer the disability tax credit. This has the potential to save them an additional $1,500 a year in taxes – plus it's possible to backfile to 1985, he says.
As well, Dowson suggests, advisors should take note of how much money a disabled individual can hold without affecting their entitlement to government programs. Recipients of the Ontario Disability Support Program (ODSP), for instance, can hold and accumulate a maximum of $5,000 in liquid assets without infringing on their ODSP benefits. Similar regulations apply in other provinces, he adds.
Therefore, if a parent wills a child a substantial sum of money, there is the danger that the inheritance will disqualify the child from receiving government benefits. The challenge for advisors is to arrange for parents to leave money to their child without reducing – or worse, eliminating – government benefits, Dowson maintains.
But beware of what Susan St. Amand calls “backwards planning.” “It’s important to look at the bigger financial picture and not expend all your energies on simply securing government benefits,” she warns. “There are several options available and it’s the advisor’s role to take things beyond the obvious.”
To Rita McLeod, a counsellor with the Saskatchewan Association for Community Living, and author of The Road Map to the Future: A financial planning guide for families of people with disabilities, it’s a question of what seems reasonable. A will that splits an estate disproportionately between able and disabled siblings is almost certainly going to be challenged, she maintains.
“The Dependants Relief Act provides that if a person makes a will and fails to make adequate provision for his or her dependants, then the dependant can apply to the court for a greater share of the estate.” In this instance, that could mean the appropriate government agency seeking to change the will, rewarding more to the dependant and reducing their benefits at the same time, she explains.
The best strategy for most clients, Pope suggests, will be an absolute discretionary trust. Known as a Henson Trust in Ontario, this is a trust that is worded such that the disabled child is deemed not to have personally received the inheritance.
The wording of the trust must be very specific, spelling out quite clearly that the funds are not in the name of the child. 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 on 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, he maintains, many parents are still relying on the Disability Expenses Trust, which, in Ontario, allows a child to inherit up to $100,000 without penalty.
The trouble with this kind of trust is that $100,000 is an inadequate sum, especially if the child is young when he or she inherits it, Pope explains. Secondly, this trust stipulates that funds can be used only for expenses directly related to the child’s disability, a feature that can severely limit trustees’ options.
Pope says he continues to be surprised by the number of planners who are unaware of the benefits of an absolute discretionary trust. “The Henson Trust is a work of art,” he says. “All it requires is that the control of the money be completely out of the hands of the beneficiary.”
When talking to parents of children with disabilities, don't be afraid to discuss the personal aspects of planning as well, Dowson advises. Besides writing a will and setting up a trust, parents should also prepare a comprehensive life plan for their disabled child. Future caregivers need to get a complete picture of the person including likes and dislikes, friends, education, preferred activities.
Clients may also want your input on how to choose a trustee. In the case of adult dependent children, for instance, it’s best to choose someone closer to the age of the beneficiary to act as trustee, rather than a contemporary of the parent. This makes it less likely that the trustee will die first, he adds. As well, be wary of siblings who may have a conflict of interest not yet evident to their parents.
Estate planning can be complicated enough with these added issues, warns Susan St. Amand. “If you don’t have the expertise yourself, you have to link up with a good lawyer who can help you help your client,” she says. “I’ve been very lucky this way and I suggest fellow advisors do the same.”
Pope, who regularly conducts seminars across Ontario for both advisors and parents, agrees: “From a business point of view, I think it would be difficult for an advisor to specialize in this area. But these issues are not something you can ignore either. There is a real need here.”
The Henson Trust |
Rollover Pitfalls |
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The Henson Trust originated when Leonard Henson, a Guelph, Ontario father, tried to make provisions for his daughter Audrey. Henson's lawyer drafted a will arranging for Audrey, who was disabled, to receive her father's estate through an absolute discretionary trust – an arrangement through which she was entitled to receive his estate without losing access to her government benefits, since the trust stipulated that she would not own the assets. The Ontario Social Services Ministry challenged Henson's will, but the will was ultimately upheld by the Ontario Court of Appeal in 1989 and has remained unchallenged ever since. |
Many parents believe their registered retirement income fund (RRIF) can roll over to their dependent adult child. But, in terms of a disabled child, such a rollover could actually render that child ineligible for provincial disability benefits. The family's view of their disabled child's "dependence" is not the same definition used by the Canada Revenue Agency (CRA). To it, dependence means an income level less than the personal exemption level in the year prior to death. In the past, anyone in receipt of Ontario Disability Support Program (ODSP) benefits received more than their personal exemption and could therefore be ruled ineligible for the rollover treatment, no matter how dependent that child may otherwise be on the parents. While Ottawa raised the threshold somewhat in its most recent budget, advisors still need to consider this in their planning. |
The above article initially appeared in the August 2004 edition of Forum magazine, the official publication of Advocis.
