Special Feature

Securing a future

In this series, learn about the complex financial planning needs of clients who have children with disabilities, and explore strategies to address those needs. Part one outlines tips for addressing this delicate topic with clients. In part two, learn about how trusts can help clients secure their child's financial future. Part three breaks down the registered disability savings plan, and part four explores the tax issues related to disability planning. Stay tuned for more disability planning advice on IE:TV.

Financial Planning

A trust can assure clients that their disabled child will be looked after when they’re gone

By Fiona Collie, IE Staff |

There are many strategies and options to weigh when helping clients develop a financial plan for a child with disabilities.

Often the most pressing concern for parents with a disabled child is who will look after the child once the parents are no longer around, says Sara Kinnear, director, tax and estate planning at Investors Group Inc. in Winnipeg.

A common planning vehicle used to answer that question is a trust. Set up by a third party, a trust gives control of a person's (the beneficiary) property and assets to another (the trustee) for the benefit of the beneficiary. There are two types of trusts: a living or ‘inter-vivos' trust, which comes into effect during the third party's lifetime; and a testamentary trust, which is executed through a person's will.

Typically a parent would choose to establish a trust for a child with a disability if he or she does not have the mental capacity to make financial decisions or if the child is very susceptible and could be easily taken advantage of by others, says Kinnear. A trust is also a good idea for people seeking provincial government benefits, such as the Ontario Disability Support Program, which is subject to an asset and income test.

One of the most commonly used trusts in disability planning is the Henson trust.  The Henson trust was named in honour of Leonard Henson, who lived in Guelph, Ont., in the 1980s and wanted to provide for his daughter, Audrey, who had special needs and was living in a group home, and who wanted to retrain her provincial benefits.

A Henson trust is also sometimes called an absolute discretionary trust and is available in British Columbia, Saskatchewan, Manitoba, Ontario, New Brunswick, Nova Scotia and Prince Edward Island. To qualify for a Henson trust the beneficiary must qualify for the disability tax credit.

Trusts can be set with whatever rules a parent or guardian feels is appropriate. What sets a Henson trust a part is the language. When creating a Henson trust, the language needs to be very specific in giving absolute discretion of the funds to the trustee. That way, the assets are not deemed to be owned by the beneficiary and therefore cannot make the beneficiary ineligible for provincial benefits.

"A well-drafted trust will say: trustees can spend money freely on the disabled person without any regard to what money will remain in the pot of subsequent beneficiaries," says Mark Halpern, certified financial planner and president and founder of illnessPROTECTION.com.

Of course, to make sure the wording is just right for the Henson trust, advisors will want to refer clients to a lawyer who specializes in wills and estates.

Before clients set up a trust, however, it's important that the advisor has a full understanding of their situation. Halpern recommends asking clients questions such as: How old is the child? What is the nature of his or her disability? What is the short-term and long-term prognosis? What costs are associated with the child's care? What sort of planning have you already done for the child's long-term needs? Are you aware of government benefits and programs that could help your child?

Advisors should also urge clients to carefully consider who will be appointed trustee. While family members, such as a sibling, may seem like the logical choice, that may not always be the case.

"There can be all kinds of contentious issues that arise with putting that burden on one sibling for the lifetime care of another," says Susan Howe, financial planning consultant, RBC Financial Planning in Tillsonburg, Ont. As well, there is a chance that the disabled child may outlive the sibling.

Howe suggests considering the possibility of a corporate trustee (or trust company), which will skip over family politics and ensure that there will always be someone available to manage the trust. 

Another point to consider is geography. Disability benefits vary from province to province, says Kinnear. As such, it's important to choose a trustee who is familiar with the beneficiary's circumstances, understands the provincial regulations and lives in the same province.

This is the second in a four-part series on disability planning. Tomorrow: Making the most of RDSPs.