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Estates & Wills & Trusts

Navigating the maze of estate planning options for special needs child

When planning for the future of a financially dependent child, choosing the option that will provide them with the most money is not always easy or straightforward, Ottawa special needs and disability estate planning lawyer Kenneth Pope writes in The Lawyer’s Daily.

One option, explains Pope, principal of Ken Pope Law, is a registered rollover. Tax-free registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) rollovers, he says, are commonly used to transfer assets from spouse to spouse and from parent or grandparent to financially dependent children or grandchildren.

However, Pope says practical and legal obstacles may arise with regards to establishing, administering and managing the account due to incapacity and possible intestacy on death.

“In addition, the rollovers only maintain their tax-free status in some situations and their transfer risks a reduction or loss of the child’s eligibility for government benefits,” he writes.

Elsewhere, Pope says parents of adult-dependent children outside Alberta can use a Henson Trust to exempt inheritance assets held in the trust from government asset tests.

“This means that money held in the trust won’t interfere with the adult-dependent child’s eligibility for provincial government disability benefits,” says Pope.

Henson Trusts, he says, cannot receive RRSPs or RRIFs on a tax-deferred basis as registered assets cannot be directly rolled over into the trust — the assets can only flow into the trust on an after-tax basis.

“Although the registered assets are received by the trust in full, the estate is responsible for paying the taxes. There is no withholding and remittance on death, and this can skew the intended division of the estate,” he writes.

Another option is a lifetime benefit trust (LBT) — a personal, testamentary trust designed specifically for beneficiaries who are financially dependent and cognitively impaired, writes Pope. This trust, “offers a unique tax savings opportunity by filling the gap created when RRSPs or RRIFs are fully taxed at the highest rate upon transfer," he adds.

“By establishing a LBT in their will, a testator’s RRSP or RRIF assets can flow into the trust as a tax-free rollover. These funds are then used by the trustee to purchase a qualifying trust annuity (QTA). An annuity pays a fixed sum of money to someone over periodic time intervals (i.e. monthly); a ‘life annuity’ provides payments for as long as the annuitant (beneficiary) lives.

“Once purchased, the QTA makes annuity payments to the trust rather than to the beneficiary of the trust. The trustee can therefore measure out the amounts paid out to the adult-dependent child so they don’t go over the maximum amounts allowed by government benefits programs.”

The LBT, he says, allows RRSPs and RRIFs to roll over on a tax-deferred basis and payments to the trust won’t affect provincial disability benefits.

“In addition, under s. 75.2 of the Income Tax Act, income is automatically attributed to the beneficiary; taxes owing are paid by the trust,” writes Pope.

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