Estate Planning Demystified: Henson Trusts
Welcome to our blog, where we aim to demystify various aspects of estate planning. In this post, we will explore Henson Trusts, a crucial tool designed to safeguard the financial interests of individuals with disabilities.
What Are Henson Trusts?
Essentially, these trusts act as a protective measure for individuals with disabilities who are set to inherit assets from an estate. A Henson Trust is a fully discretionary trust where all power rests with a named trustee. These trusts are usually established within the Will of a parent or guardian of a person with a disability. They are an important tool because assets held in a Henson Trust do not count toward the limits set provincially that entitle a person to government support (i.e., if assets are held in a Henson trust, rather than directly by a person, they do not personally control the funds so they are entitled to retain government benefits, like AISH here in Alberta, in most instances). Maintaining government supports can be extremely important, even when set to inherit a fairly large lump sum, because these supports go much further than providing a living allowance. For example, setting up a Henson Trust could ensure that a child retains prescription coverage so they are not forced to pay out of pocket for expensive medications that would quickly deplete their inheritance.
How Do Henson Trusts Work?
The core idea is to give the trustee a lot of freedom. This allows them to make smart decisions about financial support for the person with a disability + gives them the flexibility to do whatever proves best (from a tax perspective or otherwise) at the time. The beauty of this arrangement is that it keeps the beneficiary from directly controlling the inherited assets, which keeps them eligible for government benefits.
Ok … so then what is a Qualified Disability Trust (QDT)?
A QDT is a trust that qualifies for particular tax treatment under the federal Income Tax Act. Most trusts in Canada are taxed at the highest marginal rate of tax. QDTs are taxed at graduated rates (based on the income generated in the trust in any given year).
Some Henson Trusts may qualify for lower tax rates if they meet the specific criteria to be designated as a QDT. To get the QDT label, a trust must (among a few other criteria):
be set up as testamentary trust (meaning it's part of a Will)
be resident in Canada
be for the benefit of a person who qualifies for the federal disability tax credit
be the only QDT set up for such person (there can be other trusts - Henson or otherwise - but they would be taxed at the highest marginal rate of tax).
Key Things to Keep in Mind
While we're focusing on Henson Trusts here, it's important to remember that they are just one piece of the estate planning puzzle. Creating a Henson Trust is a significant decision that requires some careful thought. Picking a qualified trustee is essential, as they'll have important responsibilities that can last a long time. In some cases, people opt for multiple trustees to share the duties and, depending on the circumstances, a professional trustee may be worth considering. There is also the consideration of selecting appropriate types of investments and accounts to hold the assets within the trust - so seeking the advice of a financial advisor and accountant is very important.
Ready to start your estate planning journey, which might include setting up a Henson Trust? We invite you to schedule a free consultation. Our team is here to guide you, answer your questions, and help tailor a comprehensive estate plan that suits your unique needs.
Please be aware that the information provided in this blog is a very high level overview for educational purposes only and is not legal advice. To address your specific needs and circumstances, you must consult a qualified estate planning lawyer (as well as a financial advisor and accountant).