In Manitoba, estate planning isn’t just about the distribution of assets. Especially for beneficiaries with additional support needs, estate planning involves careful consideration and specialized strategies to ensure the well-being and financial security of those individuals. Carefully tailored plans can protect the interests of individuals with disabilities, both during their lifetime and after the will-maker’s passing.
Key considerations for estate planning with Henson Trusts
One common approach to providing for a beneficiary with disabilities is establishing a Henson Trust, named after the Ontario case of Henson v Ontario (also known as an Absolute Discretionary Trust). The primary purpose of a Henson Trust is to provide financial support while ensuring the beneficiary’s eligibility for government benefits and assistance programs remains intact. In Manitoba, Henson Trusts are established under The Trustee Act and must comply with its guidelines.
Why a Henson Trust?
Typically, individuals must not exceed certain income or asset limits to qualify for government assistance benefits. A large inheritance could disqualify a beneficiary with a disability from receiving these supports. A Henson Trust allows the “settlor” (the person setting up the trust) to set aside assets for the benefit of the “beneficiary” (the disabled individual), while appointing a “trustee” to manage those assets according to the terms outlined in the trust document.
A Henson Trust is a trust that provides the trustees with the absolute discretion to distribute income and capital from the trust to the beneficiary as they see fit. The trustees have full control as to when, if, and how much income or capital is to be paid to the beneficiary. The beneficiary of a Henson Trust has no vested interest in the income or capital of the trust. This means that they cannot claim or demand payments from the trust and, consequently, they are not considered to own the trust assets, effectively allowing them to remain eligible for government assistance benefits.
However, careful planning is essential. If the trust’s final distribution upon the beneficiary’s passing is not defined, the trust assets might be considered the beneficiary’s own, potentially affecting their government assistance benefit eligibility.
Choosing the right trustee
When establishing a Henson Trust, considerations should be made as to who should be appointed as trustee. The trustee of a Henson Trust holds significant responsibilities. Since trustees have absolute discretion over distributions, they should be someone reliable who respects the settlor’s wishes. An ideal trustee would also understand the beneficiary’s needs and be committed to meeting them. Trustee duties include:
- Determining the amount of income or capital to pay the beneficiary.
- Preparing annual tax returns for the trust.
- Keeping detailed records of assets and disbursements made to the beneficiary.
- Ensuring any real property owned by the trust is maintained.
- Deciding how to invest the trust assets.
For beneficiaries to retain government assistance benefits, the trustee must stay aware of the relevant eligibility requirements. If possible, selecting a trustee who lives close to the beneficiary can provide practical advantages in managing the trust. Since a Henson Trust may continue for a long period, especially if the beneficiary is young, naming an alternate or successor trustee can help ensure continuity if the primary trustee is unable to serve.
Tax treatment of a Henson Trust
A Henson Trust may also provide for some tax savings.
A Henson Trust is considered a separate taxpayer and must file its own tax returns. Trust income is generally taxed at the highest marginal rates for both provincial and federal taxes. However, income paid to the beneficiary is taxed in the beneficiary’s hands, often at a lower rate. While certain exceptions exist to the high marginal tax rates for trusts, proper tax planning is essential to navigate these complexities.
However, if the Henson Trust qualifies as a Qualified Disability Trust or a Preferred Beneficiary Election is made, then the income of the trust may be taxed at the graduated tax rates. More information on the tax treatment of Henson Trusts will be briefly discussed below.
Other strategies
ONE. Qualified Disability Trust
A Qualified Disability Trust (“QDT”) is a testamentary trust created upon an individual’s death, with a joint election by the trust and a qualifying beneficiary. To qualify, the trust must meet the following conditions:
- Be a testamentary trust.
- Be a factual resident in Canada throughout the whole year.
- The trust must make a joint election with a qualifying beneficiary.
- The election must be made by an individual named as a beneficiary in the trust agreement who qualifies for the federal disability tax credit.
- There is only one QDT per beneficiary.
It is possible for a trust to qualify as a QDT one year and not the next. The election will need to be made each year if all of the qualifications are met.
A QDT offers a key benefit: it is taxed at graduated rates rather than the highest marginal rate, potentially reducing the tax burden. If a Henson Trust meets the QDT requirements and an election is made, it can benefit from these graduated tax rates
TWO. Preferred Beneficiary Election
The Preferred Beneficiary Election allows Henson Trust income to be taxed at the beneficiary’s rate, potentially lowering taxes payable on trust income. This election requires that:
- The beneficiary be a Canadian resident.
- The beneficiary qualify for the Disability Tax Credit.
- The beneficiary is related to the settlor (spouse, common law partner, child, stepchild, grandchild, step-grandchild, great grandchild or step-great grandchild).
Income retained in the trust can still be taxed in the hands of the beneficiary through this election.
Consult with a legal professional
Deciding to include a Henson Trust or another strategy in your estate plan is a case-by-case decision, requiring careful consideration of your specific circumstances. The estate planning and taxation lawyers at MLT Aikins can assist with tailored estate planning solutions to support your family’s unique needs.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.