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Estates & Wills & Trusts

Henson trust advantages extend to families without special needs

Although some lawyers may know that Henson trusts are useful for families with members who have disabilities, many may not realize that there are other uses for these trusts for those who don’t have special needs, Ottawa disabilities and estate planning lawyer Kenneth Pope writes in The Lawyers Weekly.

As Pope, principal of Kenneth C. Pope Law, explains in the article, although a Henson trust is uniquely useful to protect an inheritance from disqualifying a person from provincial disability benefits, “it is also an iron-clad way to provide the usual income tax splitting opportunities, now somewhat restricted for testamentary trusts, and to protect the trust asset from claims of any sort.”

Pope says that an inheritance held by a Henson trust is subject to an absolute discretion, is a “non-vested” asset and is not beneficially the property of the beneficiary.

“This means that the inheritance held for an adult child without special needs fulfils all the standard trust advantages but additionally fully protects the inheritance from litigation claims, bankruptcy and matrimonial claims. A home held by a Henson trust is not a matrimonial home subject to division and the trust asset is not divisible as matrimonial property. This avoids the need for a matrimonial agreement very nicely, and the spouse has no right to occupancy as they normally would so, with some luck, they could be evicted by the trustee in the event of a matrimonial breakdown. I don’t suggest that a judge might not take the trust asset into account in any subjective judicial settlement, but I respectfully suggest that it would be appealable,” writes Pope.

In a bankruptcy scenario, he says, the receiver in bankruptcy can only stand in the shoes of the bankrupt as with all other claims, and cannot compel the trustee to disburse funds.

“Since the trust asset is not ‘vested’ in the beneficiary, and only ultimately vests in a residual beneficiary upon the distribution date, the assets cannot be collected to satisfy creditors. Litigation claims have only the same status, although this may not completely obviate claims and efforts to shake down the trust,” writes Pope.

He adds in the article that families creating trusts for children with disabilities could also consider charities that may have helped provide and care for the child.

Pope cites the example of a mother with a sizable estate being left to provide for a child who is blind and developmentally delayed, who will be adequately provided for by provincial benefits and the income generated by the Henson trust asset.

“She may decide to provide that upon the beneficiary’s death that the trust distribution clause leaves a sum to the charity which provided him with supported living during his lifetime. This gift will not result in a charitable tax receipt for her estate, since it is only a gift at a later date, not a donation. If instead she structures the gift as a charitable remainder trust arrangement her estate receives a tax receipt upon her death. This is a much better outcome and results in more funds available for the trust to provide for her son during his lifetime.

“The charitable remainder trust dedicates the donation, for example $200,000, to the charity on the testator’s death but it is not received until the trust beneficiary dies. On the initial death the estate receives a charitable receipt to adjust taxes owing on RRIF or other income falling into the estate. During the beneficiary’s lifetime the income earned helps to provide for him, and upon his death the charity receives the $200,000. This amount has been irrevocably designated and cannot be encroached upon,” writes Pope.

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