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When seeking advice that may involve multiple disciplines, including estate planning for a beneficiary with a disability, what type of professional is best?
I am wondering who I would reach out to for estate planning advice. I have a family member on permanent disability (independent living) and wish to arrange a trust upon my death that would not interfere with his monthly support ceiling of one thousand dollars a month (the current income is approximately one thousand four hundred).
Would this be a financial advisor question or an estate planner question?
—Libbie
One of the biggest challenges with getting advice on money is there are often many different facets to consider. In this case, Libbie, there are estate planning, income tax and investment considerations, amongst others.
You would normally speak to a lawyer about estate planning, an accountant about income tax, and an investment advisor about investing. A professional financial planner may be able to help develop an estate plan that includes establishing a trust or preparing a will with a lawyer and offer advice in all of these areas.
To set up a trust for a beneficiary with a disability, you can connect with a lawyer who can draft an inter vivos (Latin for “among the living”) trust or a testamentary (after death) trust.
In your case, Libbie, a trust upon your death—a testamentary trust—could be part of your will and come into existence when you die.
A common estate planning tool to provide for beneficiaries with disabilities is a Henson trust. This type of trust is named after Leonard Henson, who established a discretionary testamentary trust for his disabled daughter. Her government benefits were terminated as a result of her inheritance, but the trustees successfully argued in an Ontario court that the funds did not belong to her and were not her assets.
Henson trust wording is common in discretionary trusts for beneficiaries with disabilities to help preserve government benefits that are based on assets or income.
Some estate lawyers may be more experienced with the intricacies of these types of trusts than others.
A trust you include in your will does not come into existence until you die, but you can establish a trust during your life as well. A trust files an income tax return just like an individual taxpayer. Taxes arise for a trust based on the income it earns. However, the income can be allocated to a beneficiary based on income tax strategy and other practical considerations.
One benefit of a properly drafted trust—that meets the criteria of a qualified disability trust (QDT)—is that it pays tax at graduated tax rates, just like an individual would. Otherwise, a trust may be subject to the top tax rate on all its income.
A trust may be able to allocate a limited amount of income to a beneficiary with a disability without infringing upon government benefits or may be able to allocate tax-free principal.
Not all accountants are well-versed with trust taxation, so tax advice once a trust is active is important.
Another potential tool to consider for your family member is a registered disability savings plan (RDSP), Libbie. Assuming your family member qualifies for the disability tax credit (DTC), they or someone on their behalf can open an RDSP account.
An RDSP is an account that can be invested on a tax deferred basis. It can be opened up until December 31 of the year a beneficiary turns 59. If the beneficiary is 49 or younger, contributions to the account receive additional government grants, and if their income is low, they may also receive government bonds. The grants and bonds can be much higher than the contributions themselves, so this may be very lucrative.
If the family member in your case, Libbie, is a financially dependent child or grandchild, you can even leave your registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) to them upon your death and have some or all of it deposited to their RDSP on a tax-deferred basis. There is a $200,000 lifetime limit for an RDSP account that would apply to previous contributions as well as the allowable tax-deferred transfer from an RRSP or RRIF account.
The best part about the future RDSP withdrawals is they generally do not impact government benefits that are based on income thresholds.
If you leave a significant inheritance to a beneficiary with a disability, the tax savings to allocate more income to their tax return instead of having it taxed to the trust could be more than the government benefits they receive. But that would be a consideration for the trustee for the testamentary trust and their tax advisors after your death.
Depending how the trust funds are invested, keep in mind that different types of investments are taxed differently. Canadian dividends are grossed up by 38% when reported on a personal tax return and then the taxpayer claims a tax credit to reduce the tax. But it can make the relevant line number on their tax return that is used to government benefits appear to show a higher income.
Capital gains are only 50% taxable. So, this can be a tax-effective way to invest generally, as well as for those who receive means-tested government benefits. Different types of investments generate more tax-deferred income or re-characterize dividends and interest to be taxed in the future as capital gains, so an investment strategy can help preserve federal or provincial supports.
The advice you are seeking is multi-disciplinary now as well as in the future, Libbie. An estate lawyer, an accountant, or an investment advisor may be able to help, but may not be as well-versed in the other disciplines. Is a financial planner the solution? Maybe not. Some financial planners are salespeople who simply sell mutual funds. Just because someone is a doctor, it does not mean they can perform a heart transplant surgery.
A lawyer who specializes in estate planning is probably your best bet. Make sure you select a trustee for the trust who you believe can seek out the professional input after you are gone to take proper financial care of your disabled family member.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.
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Mr. Heath, you mention in this article that if the child is financially independent on you, you can leave your RRSP or RRIF to them upon death. Would this still be the case if the child is over 18 yrs of age or considered an adult?
Thank you and this is a great article.