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

RDSPs can allow disabled individuals to have some authority over their finances

By Fiona Collie |

When planning for the future of a child with a disability, the issue of control is often front and centre. Specifically, who will decide how the assets are handled and distributed? As a child approaches the age of majority, parents need to decide whether he or she would have the mental capacity to handle financial decisions.

"[Many] mental disabilities are on a scale," says Sara Kinnear, director tax and estate planning, Investors Group Inc. in Winnipeg, "and maybe [the child meets] that basic level of capacity but [he or she] may still be a vulnerable person in the sense that they are easily influenced by other people."

If clients believe that their child will never have the capacity to manage funds, then a trust is probably the best planning option. However, if the disability is such that the child can still have some control over funds, then clients could consider other options.

One vehicle that gives disabled people a little more authority over their finances is the registered disability savings plan (RDSP). Sponsors can open an RDSP for a child (or an adult) and once that person reaches the age of majority, he or she can act as a "co-plan holder," according to Joel Crocker, a director with Vancouver-based Planned Lifetime Advocacy Network (PLAN), an advocacy group for Canadians living with disabilities. "You're not declaring yourself incompetent [which can be demeaning and costly]," he says, "yet you have a growing asset."

It's important to note that in the past sponsors could only open an account for an underage child. However, this year's federal budget introduced a new rule stating that an RDSP could be opened for another adult (for example,  if a parent had a 30-year-old child). This new rule is only in affect until 2016, after that year the rules revert back and an RDSP may only be opened for a child under the age of 18.

Created in 2008, RDSPs allow plan holders to contribute up to $200,000 until Dec. 31 of the year the beneficiary turns 59. As well, depending on the holder's income, up to $70,000 in Canada disabilities savings grants and $20,000 in Canada disabilities savings bonds could be added to the account until the beneficiary turns 49.

To qualify for the RDSP, the beneficiary must qualify for the disability tax credit. In most provinces, RDSP assets and income do not interfere with the beneficiary's eligibility for provincial benefits.

Although they offer slightly different levels of authority to the beneficiary, RDSPs and trusts can still be used together.

"It depends on the family's circumstances but [trusts and RDSPs] are quite complimentary in nature," says Susan Howe, financial planning consultant, RBC Financial Planning in Tillsonburg, Ont. But she adds that some families may quickly reach the $200,000 cap and require an alternative strategy.

In British Columbia, parents have even more flexibility in keeping decision-making power in the hands of their children. B.C offers the Representation Agreement, which allows a person with disabilities to appoint someone to represent him or her in financial decisions, says Crocker. For example, with this agreement a person with a disability can go into a bank and open an account in their own name with their representative acting as a kind of co-signer.

"There's nothing quite like it in the other provinces," says Crocker, "though [PLAN has] been trying to see if we can get it replicated."

Regardless of the child's level of capacity and whether money is set up in a trust or an RDSP, it's important that family members work together to plan for the disabled child's future.

Often other family members wishing to help will leave an inheritance for the child, says Peter Weissman, partner, taxation, Cadesky and Associates LLP, in Toronto. However, that inheritance could leave the child ineligible for provincial benefits. As such, it's important that advisors meet with the extended family to discuss future plans for the child.

This is the third in a four-part series on disability planning. Tomorrow: Understanding the tax issues related to disability planning.