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Most provincial regulations provide that individual receiving disability payments are allowed to receive discretionary benefits from third parties without affecting their eligibility for disability payments. The discretion afforded to the trustees of a Henson trust is the essential characteristic of the trust. For the trust to be effective, the trustees must have absolute discretion to distribute income and capital from the trust as they see fit. Conversely, they must also have absolute discretion to withhold the income and capital. The beneficiary of a Henson trust gains no vested right to the income or capital under the trust. They cannot claim payments from the trust, they cannot demand them, and they do not, as a result, own the contents of the trust. As long as there is absolute discretion on the part of the trustees, a Henson trust can be set up on a testamentary (established by a deceased person) or inter vivos (established by a living person) basis.
Advantages of a Henson trust A Henson trust provides the following advantages:
Money from a Henson trust can substantially improve the quality of life of a disabled person – it can be used to pay for their expenses, such as trips, clothes, and homecare attendants while at the same time allowing their government support and access to government programming to continue.
A Henson trust ensures that the disabled person is provided for financially, even in the event of the subsequent incapacity of the settlor (usually a parent) who established the trust. • A Henson trust eliminates the payment of probate fees payable on the property settled in the trust insofar as those assets are to be transferred to residual beneficiaries, outside of the settlor’s estate.
A Henson trust can result in an overall savings of income tax: any income earned in the trust could be taxed at the marginal tax rate of the disabled person rather than at the highest marginal rate (inter vivos trusts)
Disadvantages of a Henson trust A Henson trust provides the following disadvantages:
Finding a trustee willing to care for a disabled person during their lifetime is difficult. Careful consideration must be given to the choice of trustees, as they will have complete control and absolute discretion over the trust’s assets. Siblings, which are usually the most logical choice, often have a potential conflict of interest because they are likely to be the residual beneficiaries of the trust (during the lifetime or upon the death of their disabled brother or sister). Appointing a corporate trustee such as a trust company may make sense especially where there are no close relatives able or willing to act or where the trust is likely to be administered over a lengthy period of time.
Provincial governments can change their regulations to disallow Henson trusts and apply those changes to existing and future trusts.
An improperly constructed trust may disqualify a disabled person from their entitlement to disability benefits.
For more information on Henson Trusts, please contact your advisor at (416) 884-2104
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