Co-ordinate payments from RDSPs and Henson Trusts
By AdvocateDaily.com Staff
Disbursements from Henson Trusts and Registered Disability Savings Plans (RDSP) can be co-ordinated to provide for children with special needs, Ottawa disabilities and estate planning lawyer Kenneth Pope tells AdvocateDaily.com.
Pope, principal of Kenneth C. Pope Law, says that parents are often confused about the interaction between the two, and wish to roll one into the other as part of their will.
“That can’t be done — the Henson Trust is completely separate from the RDSP,” he says, explaining that while the parents of a child with disabilities may be the account holders of their RDSP, the child is the actual owner and beneficiary of the plan.
Henson Trusts, by contrast, receive the child’s inheritance from the parents after they die, made up of assets from the estate.
Still, when it comes to disbursements, Pope says the payments can be co-ordinated according to the needs of the recipient.
“To ensure they will be well taken care of, the two amounts will be used together to provide for the child, along with provincial disability benefits. Eventually, there will also be an old age security pension and guaranteed income supplements,” he adds.
Properly invested and fully funded, Pope says beneficiaries of RDSPs can accumulate substantial funds. Parents who contribute $30,000 over the 20-year term can attract up to $90,000 in matching amounts from the government. At an annual return rate of five per cent, Pope says the final value of the plan can often exceed $300,000.
Contributions usually start when the child reaches 18 years of age, so following the 20-year contribution and 10-year vesting periods, a child with disabilities becomes eligible for payments in their late 40s.
Once all the money has vested, a prescribed lifetime disability assistance payment formula dictates how the plan will be paid out over a 23-year period. Pope says that annual payments typically range between $8,500 and $12,500 per year, with 90 per cent of the amount deemed income. Payments are ODSP exempt, and since recipients will typically have personal and disability tax credits totalling about $20,000, the RDSP income is generally not taxable, he says. If the child dies with money left in the plan, the residue goes into their estate.
Meanwhile, income from Henson Trusts, which were initially designed to protect the inheritance of children with special needs, serve as a supplementary source of support. Disbursements are fully discretionary in the hands of the trustee, and can be used for any purpose, Pope says.
“The trustee can disburse funds generously, or they can pay out nothing, which is why you have to be very careful to select someone you trust in the role,” he says.
Pope says many trustees elect to purchase a home for the beneficiary via the testamentary trust because the property can then be deemed the person’s principal residence, exempting it from capital gains tax.
"Inter Vivos trusts unfortunately no longer qualify for this exemption," he says.