When you are considering disability planning options, Henson Trusts will likely come up at some point. Here are some pros and cons to this possible course of action of which you need to be aware.
Advantages of a Henson Trust
A Beneficiary Can Receive Public Benefits
The first major advantage of the Henson Trust is the obvious one, and it is the reason why people set it up in the first place. It allows for a beneficiary to receive public benefits without having to use the money that is placed in the trust. Normally, public authorities will have a means test for public benefit, and that money would count against the beneficiary. The usual limit on assets is $40,000. The Henson Trust takes the money out of the beneficiary’s control and puts it in the hands of the trustee. This essentially removes their legal ownership of the assets.
The Beneficiary Will Be Provided for During Their Lifetime
The Henson Trust will also ensure that the beneficiary is provided for over the course of their lifetime. The assets in the trust can be used for the benefit of the person with special needs, and it will improve their quality of life. This could include care and other material support that they need to have a better situation. The trustee is free to use these assets for the benefit of the person with special needs as they see fit, thanks to the absolute discretion that they have.
With the money in the trust, the beneficiary will always be provided for, so long as there are still assets. This is an invaluable way for families to know that their disabled loved ones will be taken care of long after they are gone. Families can place an unlimited amount of money in a Henson Trust, and it will give them peace of mind.
The other important reason for a trust other than preserving benefits, is for when the person cannot manage the inheritance themselves or would be vulnerable, manipulated or abused, therefore, requiring a trustee. There are also certain cases when the person is not on ODSP but still needs a trust to manage their inheritance.
The Tax Rates on Trust Income Are Lower
There are also tax advantages of placing assets in a Henson Trust. Presumably, the trustee will be investing the money and using it to earn dividends or other investment income. In the case of a regular inter vivos trust, the tax rate will be the highest marginal rate, and there could be quite a tax hit when there is income. Henson Trusts allow for the beneficiary’s income to be used as a base for the tax rate. Considering that there are strict income limits that govern the receipt of public benefits, it ensures that the tax rate will be very low.
Drawbacks to a Henson Trust
While many people find Henson Trusts to be beneficial for the reasons stated above, here are some things that may give them concern.
The Trustee Has Wide Discretion
One of the major possible drawbacks of Henson Trusts will not always be a problem. The trustee is given an incredible amount of power over the money as they have absolute discretion over the assets. They can invest them as they see fit and provide for the beneficiary as they choose. The settlor is showing a very high degree of confidence in the trustee that they will both be smart with the assets and take care of the beneficiary. In most cases, this is not a problem, but it can be an issue if the settlor ends up choosing the wrong person as trustee.
The Laws Change Frequently
Another possible disadvantage is the fact that the laws of Henson Trusts seem to change frequently. Every so often, one of the provinces may even try to mount an attack on the legality of these trusts as they cost governments money. ODSP could alter the rules for eligibility for public benefits, including those on distributions and purposes for which the money may be used. The good news is that one province tried to challenge the legality of Henson Trusts. In 2018, the Canadian Supreme Court reaffirmed their legality, so they are seemingly here to stay, albeit with the possibility of changed rules. A Henson Trust lawyer could advise you of the current legal rules that could affect your disability planning.
There Could Be High Costs
Finally, the costs of establishing and operating a Henson Trust could eat into the assets. While Henson Trusts provide valuable benefits, there is a fee to establish the trust. In addition, many settlors will decide that the best way to manage the money is to hire a professional trustee. While this may maximize the investment performance, you would pay a percentage of the assets each year as fees. In addition, you would also need to prepare tax returns and will have other administrative requirements, each of which cost money; however, many families find that the ability of the beneficiary to receive public benefits far outweighs the costs of the trust.