Within estate planning, a common priority is safeguarding the interests of a spouse or partner, children and other family members. In situations where a family member has a disability, this priority may take on a heightened focus, and there are often additional considerations to factor in as part of your estate plans.
If your family is navigating this area of planning, you may be wondering, How do I ensure my loved one’s financial well-being? Or, How do I make sure they’re taken care of and have the financial resources they’ll need? In helping to ensure the financial security of a beneficiary with a disability, it’s about aligning your family’s particular circumstances with the most effective approach and accounting for key details that may impact how plans are structured (such as potential government disability-related benefits, the beneficiary’s capacity to manage their assets and the minimization of taxes).
Here’s a more detailed look at two possible planning approaches for beneficiaries with disabilities: the Henson Trust and the Registered Disability Savings Plan (RDSP).
Note: The following information is only a selection of considerations and may not necessarily apply to your particular circumstances. To ensure your own situation has been properly addressed, it’s crucial to consult with your qualified tax and legal advisors.
Holding assets in a Henson Trust
In general, a trust document enables you to set out the terms of the trust, where you can specify how you’d like the property to be managed and when and how you’d like the property to be distributed. It may be especially useful if a beneficiary isn’t capable of managing their own financial affairs and may also help in safeguarding the beneficiary’s entitlement to provincial disability benefits.
A Henson Trust is a trust that can be inter vivos (created during your lifetime) or testamentary (created on your death through your Will) and provides trustees with the absolute discretion over the distribution of income and capital. This means trustees have full control over if, when and how much income or capital to pay to the beneficiary, and the beneficiary isn’t considered to own the trust assets.
There’s no limit on the amount of assets that can be placed in a Henson Trust, but there may be limits on the distributions that can be made to the disabled beneficiary without diminishing their government benefits.
Keep in mind:
A Henson Trust may not be available as a strategy in every province or territory. As such, it’s crucial to consult with a qualified legal advisor to determine whether a Henson Trust is recognized in the beneficiary’s province of residence before utilizing this tool.
In general, the income earned and retained in a Henson Trust will be taxed at the highest marginal tax rate in the trust’s province or territory of residence. Income earned in a trust and paid or made payable to a beneficiary will generally be taxed in the beneficiary’s hands.
Note that there are exceptions to this tax treatment where a trust is set up for a disabled beneficiary and certain other conditions are met, such as if a trust qualifies as a Qualified Disability Trust (QDT) or if there’s a Preferred Beneficiary Election. For each, there are qualifying criteria, so it’s important to look into whether the potential benefits and tax savings may apply to your family’s particular circumstances.
It’s important to give careful thought to who will act as the trustee(s), as the chosen trustee(s) will be responsible for managing the trust assets, maintaining proper records and filing trust tax returns. In choosing a trustee(s), you should consider:
- Whether the trustee understands the unique needs and circumstances of your loved one.
- The trustee’s age, as you’ll likely want them to outlive the beneficiary.
- The trustee’s knowledge and ability to act, and their willingness to act, given the time commitment involved.
- The potential impact on the relationship between the trustee and the beneficiary or any possible conflict of interest.
Depending on your circumstances and the demands of the role, a trust company may be an option to consider. It can help by acting as the trustee—or as an agent for the named trustee—to manage the trust assets and offer neutrality, expertise and continuity.
Find out more about RBC Royal Trust and its trustee services.
Registered Disability Savings Plan (RDSP)
An RDSP is a registered savings plan designed to assist individuals with disabilities in saving for their long-term financial needs. It offers tax-deferred investment growth, generous government matching grants and bonds, and an opportunity for family members to assist with contributions.
To qualify, the beneficiary must:
- Be eligible for the disability tax credit (DTC).
- Have a valid social insurance number.
- Be a Canadian resident on plan opening.
- Be under the age of 60.
Depending on the age and mental capacity of the beneficiary, the RDSP beneficiary, parent or a person legally authorized to act on behalf of the beneficiary may be the “holder” of the RDSP (i.e. the person who can open and manage the RDSP for the benefit of the beneficiary).
RDSPs don’t have an annual contribution limit, but there is a lifetime contribution limit of $200,000. Contributions to an RDSP can be made until the end of the year the beneficiary turns 59. To accelerate the growth of an RDSP, the federal government offers matching grants (Canada Disability Savings Grants (CDSGs)), depending on the amount contributed and the beneficiary’s family income. Contributions up until the end of the year a beneficiary turns 49 may attract CDSG of up to $3,500 annually, with a lifetime limit of $70,000. The federal government also deposits up to $1,000 per year (known as the Canada Disability Savings Bond (CDSB)) into the RDSPs of low-income families until the end of the year the beneficiary turns age 49, with a lifetime limit of $20,000. This bond also depends on the beneficiary’s annual net family income.
Withdrawals from an RDSP can generally be made at any time but may be subject to restrictions and may trigger the repayment of government grants and bonds if made prior to the beneficiary reaching the age of 60.
Growth and income earned in the plan, as well as any grant/bond paid into the plan, is tax-free until it’s withdrawn from the RDSP. In the year it’s withdrawn, it’s taxable to the beneficiary. Contributions to the plan, however, are not taxable on withdrawal.
Keep in mind:
All provincial disability support programs fully or partially exempt RDSP assets and income. RDSP withdrawals also generally don’t affect eligibility for federal government income-based benefits such as OAS, the GST/HST credit and the Canada Child Benefit (CCB).
You can direct in your Will that funds be contributed to an RDSP for your disabled beneficiary. If you’re a parent or grandparent of a disabled beneficiary who’s financially dependent on you at the time of your death, there may be an opportunity to defer tax on your Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) proceeds on death if they’re transferred to an RDSP for the benefit of your disabled beneficiary.
For more specific information on these or other planning options for beneficiaries with disabilities, please speak with your RBC advisor.
This document has been prepared for use by the RBC Wealth Management member companies, RBC Dominion Securities Inc.*, RBC Phillips, Hager & North Investment Counsel Inc., RBC Global Asset Management Inc., Royal Trust Corporation of Canada and The Royal Trust Company (collectively, the “Companies”) and their affiliate, Royal Mutual Funds Inc. (RMFI). *Member – Canada Investor Protection Fund. Each of the Companies, RMFI and Royal Bank of Canada are separate corporate entities which are affiliates. “RBC advisor” refers to Private Bankers who are employees of Royal Bank of Canada and licenced representatives of RMFI, Investment Counsellors who are employees of RBC Phillips, Hager & North Investment Counsel Inc. and the private client division of RBC Global Asset Management Inc., Senior Trust Advisors and Trust Officers who are employees of The Royal Trust Company or Royal Trust Corporation of Canada, or Investment Advisors who are employees of RBC Dominion Securities Inc. In Quebec, financial planning services are provided by RMFI which is licenced as a financial services firm in that province. In the rest of Canada, financial planning services are available through RMFI, Royal Trust Corporation of Canada, The Royal Trust Company, or RBC Dominion Securities Inc. Estate and trust services are provided by Royal Trust Corporation of Canada and The Royal Trust Company. If specific products or services are not offered by one of the Companies, clients may request a referral to another RBC partner. The strategies, advice and technical content in this publication are provided for the general guidance and benefit of our clients, based on information believed to be accurate and complete, but neither the Companies, RMFI, nor Royal Bank of Canada, nor any of its affiliates nor any other person can guarantee accuracy or completeness. This publication is not intended as nor does it constitute tax or legal advice. Readers should consult a qualified legal, tax or other professional advisor when planning to implement a strategy. This will ensure that their individual circumstances have been considered properly and that action is taken on the latest available information. Interest rates, market conditions, tax rules, and other investment factors are subject to change. This information is not investment advice and should only be used in conjunction with a discussion with your RBC advisor. None of the Companies, RMFI, Royal Bank of Canada nor any of its affiliates nor any other person accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. In certain branch locations, one or more of the Companies may carry on business from premises shared with other Royal Bank of Canada affiliates. Notwithstanding this fact, each of the Companies is a separate business and personal information and confidential information relating to client accounts can only be disclosed to other RBC affiliates if required to service your needs, by law or with your consent. Under the RBC Code of Conduct, RBC Privacy Principles and RBC Conflict of Interest Policy confidential information may not be shared between RBC affiliates without a valid reason.
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