Henson Trust: How It Helps Protect Your Loved One's Future
Key Takeaways:
- Henson Trusts are a type of discretionary trust in Ontario, Canada, designed to protect the assets of individuals with disabilities.
- Henson Trusts are not subject to the normal rules of asset testing for government benefits, allowing beneficiaries to maintain their eligibility for programs like the Disability Tax Credit and Registered Disability Savings Plan.
- Henson Trusts are distinct from other trust structures like self-invested personal pensions (SIPPs), investment trusts, and endowment policies, each with its own unique features and purposes.
- Establishing a Henson Trust involves working with a qualified legal professional and considering factors like trust administration, withdrawal policies, and associated fees.
Henson Trusts in Ontario: Everything You Need to Know
Henson Trusts are a unique estate planning tool in Ontario that can help protect the financial future of a loved one with a disability. In this comprehensive guide, we'll cover everything you need to know about Henson Trusts - from how they work to the key benefits and considerations. Whether you're planning for your own future or a family member's, this article has the insights to help you make an informed decision.
- What is a Henson Trust?
- How Do Henson Trusts Work?
- The Benefits of Henson Trusts
- Who Qualifies for a Henson Trust?
- Costs and Fees of Henson Trusts
- Alternatives to a Henson Trust
- How to Create a Henson Trust
- FAQs about Henson Trusts
What is a Henson Trust?
A Henson Trust, named after the landmark case that established this type of trust, is a special type of discretionary trust used in Ontario estate planning. The key purpose of a Henson Trust is to provide for the long-term financial security of a loved one with a disability, while ensuring they remain eligible for government assistance programs like the Ontario Disability Support Program (ODSP).
Well, here's the thing - traditional trusts and other assets can sometimes disqualify people with disabilities from accessing crucial government benefits. The beauty of a Henson Trust is that it allows the trust's assets to be used for the beneficiary's care and quality of life, without affecting their government assistance eligibility.
In essence, a Henson Trust gives you the power to provide for a loved one's future, while ensuring they can maintain access to the support systems they rely on.
How Do Henson Trusts Work?
The way a Henson Trust works is quite straightforward. The trust is established by the will or living trust of the person setting it up (the "settlor"). This person appoints a trustee, who is responsible for managing and distributing the trust's assets according to the settlor's wishes.
The key feature of a Henson Trust is that the trustee has absolute discretion over if, when, and how much of the trust's assets are distributed to the beneficiary. This discretionary control is what allows the trust's assets to be excluded from the beneficiary's net worth when determining their eligibility for government assistance programs like ODSP.
Essentially, the beneficiary doesn't have any legal right to demand distributions from the trust. The trustee can choose to provide funds for the beneficiary's care, housing, education, and other needs - but they aren't obligated to do so. This structure protects the beneficiary's government benefits while still allowing the trust to improve their quality of life.
The Benefits of Henson Trusts
Henson Trusts offer a number of key benefits for families planning for a loved one with a disability:
Preserves Government Assistance Eligibility: By granting the trustee discretionary control over distributions, a Henson Trust ensures the beneficiary's assets don't count against them when applying for programs like ODSP. This allows them to maintain access to vital government support.
Provides Lifelong Financial Security: The trust can continue providing for the beneficiary's needs long after the settlor has passed away, giving them financial stability and peace of mind.
Flexible Distribution of Assets: The trustee has the flexibility to distribute trust assets as needed to enhance the beneficiary's quality of life, without restrictions.
Privacy and Control: Henson Trusts are private arrangements, allowing the settlor to maintain control over how their assets are managed and distributed.
Tax Advantages: Income earned by the trust is taxed at the trust level rather than the beneficiary's personal tax rate, potentially resulting in tax savings.
Who Qualifies for a Henson Trust?
In Ontario, Henson Trusts are specifically designed to benefit individuals with disabilities who are receiving or eligible for government assistance programs. To qualify, the beneficiary must:
- Have a physical or intellectual disability that is expected to be permanent
- Be eligible for and receiving (or able to receive) government disability benefits like ODSP
- Be legally incapable of managing their own financial affairs
It's important to note that the beneficiary doesn't need to be receiving government assistance at the time the trust is created - they just need to be eligible. This allows the trust to be set up in advance, providing for their future needs.
The settlor of the Henson Trust can be the person with the disability, a family member, or any other individual or organization. As long as the trust is structured properly, it can effectively protect the beneficiary's government assistance eligibility.
Costs and Fees of Henson Trusts
Establishing a Henson Trust in Ontario does come with some associated costs and fees. The exact amount can vary depending on the complexity of the trust, the size of the estate, and the professional services required.
Some of the common costs to consider include:
- Legal Fees: The initial setup of the Henson Trust, including drafting the trust documents, can range from $2,000 to $5,000 or more, depending on the lawyer's hourly rate and the complexity of your situation.
- Trustee Fees: If you appoint a professional trustee (such as a trust company or law firm), they will charge an annual fee, typically ranging from 0.5% to 1.5% of the trust's assets.
- Administrative Costs: There may be additional fees for things like tax preparation, accounting, and other ongoing administrative tasks related to managing the trust.
It's important to carefully consider the long-term costs and find a solution that fits your budget. Your estate planning lawyer can provide a detailed estimate of the expected fees and help you understand the financial implications of establishing a Henson Trust.
Alternatives to a Henson Trust
While Henson Trusts are a popular and effective estate planning tool in Ontario, they aren't the only option for providing for a loved one with a disability. Some alternative strategies to consider include:
Registered Disability Savings Plan (RDSP): An RDSP is a government-sponsored savings account that allows people with disabilities and their families to save for the future. Contributions are eligible for government grants and bonds, and the assets in an RDSP don't affect ODSP eligibility.
Absolute Discretionary Trust: Similar to a Henson Trust, an Absolute Discretionary Trust gives the trustee full control over distributions, preserving the beneficiary's government assistance eligibility.
Gift or Bequest: Directly gifting or bequeathing assets to a person with a disability can provide financial support, but may impact their government benefits.
Each of these options has its own advantages and drawbacks, so it's important to carefully evaluate your specific situation and goals with the help of an experienced estate planning lawyer.
How to Create a Henson Trust
Establishing a Henson Trust in Ontario typically involves the following steps:
- Consult an Estate Planning Lawyer: Work with a lawyer who specializes in estate planning and has experience creating Henson Trusts. They can guide you through the process and ensure the trust is structured properly.
- Determine the Trust's Purpose and Terms: Clearly define the trust's objectives, such as providing for the beneficiary's care and quality of life. Decide on things like the trustee, distribution guidelines, and whether the trust will be part of your will or a separate living trust.
- Fund the Trust: Transfer the desired assets (e.g., cash, investments, real estate) into the Henson Trust. This can be done during your lifetime or as part of your estate plan.
- Appoint a Trustee: Choose a trusted individual, such as a family member or professional trustee, to manage the trust's assets and make distribution decisions.
- Review and Update the Trust: Periodically review the trust to ensure it continues to meet the beneficiary's needs and your estate planning goals. Make any necessary adjustments over time.
Creating a Henson Trust requires careful planning and attention to detail. Working closely with an experienced estate planning lawyer is crucial to ensure the trust is established correctly and functions as intended.
FAQs
What is the difference between a Henson Trust and a self-invested personal pension (SIPP)?
A Henson Trust and a self-invested personal pension (SIPP) are two very different financial instruments. A Henson Trust is a type of discretionary trust used in Ontario estate planning to provide for a person with a disability, while a SIPP is a type of personal pension plan that allows the account holder to make their own investment decisions. The key difference is that a Henson Trust is designed to preserve government assistance eligibility, while a SIPP is a retirement savings vehicle.
Can a Henson Trust be used instead of an investment trust?
No, a Henson Trust and an investment trust serve different purposes. A Henson Trust is specifically designed to provide for a person with a disability and protect their government assistance eligibility, while an investment trust is a pooled investment vehicle used to manage and grow assets. While both types of trusts involve the management of assets, a Henson Trust has the unique feature of giving the trustee discretionary control over distributions to the beneficiary.
How does a Henson Trust differ from an endowment policy?
An endowment policy is a type of life insurance product that provides a lump-sum payment upon the policyholder's death or at a predetermined maturity date. In contrast, a Henson Trust is an estate planning tool that allows the trustee to manage and distribute assets for the benefit of a person with a disability, with the goal of preserving their government assistance eligibility. The key difference is that a Henson Trust offers more flexibility and control over the assets, while an endowment policy is a standalone financial product.
What is the Henson Trust withdrawal process?
The Henson Trust withdrawal process is not straightforward, as the trustee has absolute discretion over if, when, and how much of the trust's assets are distributed to the beneficiary. The trustee is not obligated to make any withdrawals, and the beneficiary has no legal right to demand distributions from the trust. Any withdrawals made by the trustee must be used for the beneficiary's care, support, and quality of life, while ensuring they maintain their government assistance eligibility.
What are the typical Henson Trust fees?
The fees associated with a Henson Trust can vary depending on the complexity of the trust, the size of the estate, and the professional services required. Common fees include legal fees for the initial setup (typically $2,000 to $5,000 or more), trustee fees (usually 0.5% to 1.5% of the trust's assets per year), and administrative costs for tasks like tax preparation and accounting. It's important to carefully consider the long-term costs and find a solution that fits your budget when establishing a Henson Trust.
