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Funding Henson trusts with life insurance

Parents often worry about how their children with disabilities will be taken care of after they’re gone, but there are options that aren’t always so obvious, Ottawa disabilities and estate planning lawyer Kenneth Pope tells AdvocateDaily.com.

“Parents will want to have a will that leaves something to that child, among the other children, but an inheritance like that will disqualify the child from provincial disability benefits,” explains Pope, principal of Kenneth C. Pope Law. “They must also consider whether the child will be able to manage the inheritance, and if not, they will need a trust and a trustee to do it on their behalf.”

One way that parents provide peace of mind for themselves is by buying life insurance — whole life or universal — so that, if nothing else is left, the life insurance can be placed in a trust for this child with special needs, Pope says.

“Funding a trust with life insurance could be very beneficial,” he says. “And there may be a couple of different ways to pay those insurance premiums without adding to the family’s financial burden.”

Henson Trusts are one tool that allows parents to ensure their special needs child will be taken care of, Pope says.

“Benefits received from a whole or universal T-100 or Term-100 fixed premium joint life insurance policy can be placed into the trust,” he says.

Planning is key, and that begins with the will which, Pope points out, only half the population has.

“And of those who do, very few have trusts. That means it’s not entirely clear what the child will be left with,” he says.

Pope cites the example of a couple, who at age 55, decide to set up a $100,000 insurance policy to be certain their child has something in addition to the estate when they’re gone.

The annual premiums are about $1,128, or just under $100 per month, to be paid until the last parent dies. At that point, the child's trust gets the full $100,000 tax-free within 30 days and it isn’t subject to probate delays.

Pope says a couple that puts $1,128 away every year on their own would have to save for 88 years to amass $100,000.

“You can see that a person could not accumulate $100,000 by saving the annual premium for the remainder of their life, the life expectancy at age 55 is 30 more years,” he says. “So the return on this type of 'investment' is obviously much higher than saving $1,128 per year and putting it into three- or four-year GIC or whatever vehicle you want. It’s simply not going to happen.”

Pope also suggests there may be ways for families with a member living at home and receiving Ontario disability benefits to pay for the premiums.

People with disabilities living at home only receive $881 each month for room and board. But most of them can also claim shelter plus supplementary benefit when the child pays a minimum of $500 per month to the parents for shelter expenses, boosting their monthly nontaxable benefits to $1,151.

“It will only take about four months of that increased amount to pay that premium,” suggests Pope.

As well, many of the parents don’t use the disability tax credit, though they can backfile it for up to 10 years, and recapture $16,000.

“Then it reduces their taxes by $1,600 per year going forward. Which is more than the annual premium of the joint life policy,” he says.

The caregiver credit is another benefit that many don’t take advantage of to reduce their taxes by $1,000 per year. As of 2017, the criteria for the caregiver credit removed the requirement for the child with disabilities to be living at home, meaning that it will likely apply to all 340,000 people on ODSP.

Pope’s experience in presenting these options to parents results in about one in four deciding to purchase the additional life insurance specifically to fund the trust.

If the parents overfund the trust or if the disabled child is not able to use the entire $100,000, the remainder can be left to surviving children, like a delayed inheritance, says Pope.

“It’s a very advantageous arrangement that is largely self-funded based on tax credits or benefits paid for the child,” Pope says.

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