If you are planning to provide financially for a person with an ongoing disability, a key consideration is to ensure that the assets they receive do not impact their ability to receive government-related financial support. Without proper planning, leaving an inheritance for a loved one with a disability could disqualify them from government benefits that they otherwise could have accessed. Government income-support programs for those with disabilities are income-tested and asset-tested. This means that the disabled individuals’ eligibility is impacted by the amount of other income they receive and the assets that they own. A Henson trust is a tool designed to allow someone to financially support a loved one with a disability, without infringing on their ability to receive disability-related benefits.

What is a Henson trust? A Henson trust provides absolute discretion to the trustee (usually a family member) to distribute income and capital from the trust to a beneficiary, as they see fit. The trustee has full control over if, when, and how much capital is paid to the beneficiary. The beneficiary is not considered to own the assets in the trust, and therefore cannot demand payment from the trust. There is no limit to the size of the trust, although there are limits to the yearly amounts that can be distributed to the beneficiary without affecting their eligibility for government support programs (certain approved disability-related expenses are excluded from this limit).

How is a Henson trust taxed? A Henson trust, like all other trusts, is treated as a separate taxpayer. Income earned and retained in the trust will be taxed at the highest marginal tax bracket. Any income paid out to a disabled beneficiary will be taxed in the beneficiary’s hands. Two exceptions apply when the income earned is taxed at a graduated tax rate: 1) Qualified Disability Trust and 2) Preferred beneficiary election (ask your advisor for more details on these options, as their terms and requirements are somewhat complicated).

Is the Henson trust appropriate for my situation? The appropriateness of a Henson trust varies from case to case. For example, if the disabled person has significant assets and does not qualify for government related income support, establishing a Henson trust may not be necessary. It may also not be suitable for those who would receive an inheritance that far exceeds the amount of government-related income support. Therefore, it is important to discuss all available options with your advisor, to determine if a Henson trust might be beneficial in your circumstances, or if other financial planning instruments should be used.

The Henson Trust could be a useful tool for planning for a disabled beneficiary, but it is important to consult an expert to determine if this is the optimal tool. The cost of establishing the trust, finding the appropriate trustee, and the fact that the disabled beneficiary has no guarantee of, or control over, the funds in the Henson trust should all be considered before establishing this kind of trust. Seeking professional advice is vital to the process planning for the long-term financial security of a loved one.