Henson Trusts in BC: Leaving Money to a Loved One With a Disability

If your child, sibling or another loved one receives BC disability assistance, leaving them money directly in your will can work against them. BC's disability assistance rules count inheritances and limit the assets a recipient can hold, so a well-meant gift can reduce or interrupt their support.

A Henson trust is the usual planning answer. This article explains how BC treats trusts for people with disabilities, how a Henson trust differs from other options such as an RDSP, and what to think about when you put one in your will.

Why an outright inheritance can cause problems

BC disability assistance is governed by the Employment and Assistance for Persons with Disabilities Regulation. Two of its rules matter most for an inheritance:

• Asset limits. A family unit with one person designated as a person with disabilities is not eligible if its non-exempt assets are worth more than $100,000. The limit is $200,000 where two people in the family unit are designated.
• Income rules. The regulation treats money received from a trust or an inheritance as unearned income, which can reduce assistance unless an exemption applies.

There is a short safety valve. When a person with disabilities receives an asset and intends to put it into a registered disability savings plan (RDSP) or a trust, the regulation exempts it for 3 months, which the ministry can extend if reasonable efforts are being made. That helps when a gift arrives unplanned, but it is better not to rely on it.

How BC treats trusts for a person with disabilities

BC recognizes two broad kinds of trust for this purpose, and they are treated differently.

Non-discretionary trusts

Where the beneficiary has some control, or the trustee must make payments, the trust capital is an asset. The regulation exempts up to $200,000 of capital contributed to such trusts, or a higher amount if the ministry is satisfied that the person's lifetime disability-related costs will exceed that. The beneficiary must keep records of the capital and the payments made.

Discretionary trusts: the Henson trust

A Henson trust, named after an Ontario court case, is a trust in which the trustee has complete discretion over whether, when and how much to pay to the beneficiary. The beneficiary cannot demand payment or collapse the trust.

The ministry's published policy says it generally does not consider a discretionary trust to be an asset if the beneficiary cannot end it and take the capital. As a result, there is no dollar limit on a non-collapsible discretionary trust. If the trust can be collapsed by the beneficiary, the ministry treats it as an asset. The drafting of the trust is what decides which side of that line it falls on.

Payments out of the trust

Holding money in a Henson trust protects it as an asset. Paying it out is a separate question. The regulation treats payments from both discretionary and non-discretionary trusts as unearned income, but exempts payments applied exclusively to:

• Disability-related costs, such as medical aids, caregiver and other disability-related services, education or training, and needed home renovations and maintenance.
• A home, meaning the acquisition of the family unit's place of residence.
• An RESP or RDSP contribution.
• Items that promote independence. The ministry's policy says this category is read broadly and is decided by the beneficiary or the trustees, not ministry staff.

Recipients must report trust changes and activity that may affect eligibility, and trustees should keep accounts that can be produced on request. Trustees who understand these rules can use the trust to improve the person's life without putting their assistance at risk.

RDSPs, the Canada Disability Benefit and the trust

A Henson trust often works alongside other supports rather than replacing them:

• RDSP. Funds in an RDSP, and money withdrawn from one, are exempt under BC's rules. A trustee can also contribute trust money to the beneficiary's RDSP, and that payment is exempt.
• Canada Disability Benefit. The regulation now exempts federal Canada Disability Benefit payments, both as an asset and as income.
• Tax. A trust created by will may be able to elect to be a qualified disability trust for a year, with the beneficiary, where the beneficiary is eligible for the disability tax credit. Your accountant can advise on whether the election helps.

What to decide when you put one in your will

A Henson trust is usually created in a will, so it takes effect on death without a separate trust agreement. The key decisions are:

• Trustees. Choose people who will exercise judgment kindly and keep proper records, and name replacements. Our guide to choosing an executor in BC covers many of the same considerations.
• Guidance. A letter of wishes can explain how you hope the money will be used without limiting the trustee's discretion.
• What happens later. Name who receives what is left when the beneficiary dies.
• Fairness among your children. Under section 60 of the Wills, Estates and Succession Act, a child can ask the court to vary a will that does not make adequate provision for them. A carefully explained plan for each child helps reduce that risk.

A Henson trust belongs with the rest of your planning, including your powers of attorney. Our overview of estate planning documents every BC adult should have shows how the pieces fit together.

Planning for a loved one with a disability? Build the trust into your will

Our wills and estate planning lawyers can explain how a Henson trust would work for your family, draft it into your will with suitable trustees and successor provisions, and coordinate it with the beneficiary's RDSP and the rest of your estate plan.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.