Henson Trusts - Hull on Estates #159
Listen to Henson Trusts
This week on Hull on Estates, Rick Bickhram and Sarah Fitzpatrick discuss Henson trusts (also called absolute discretionary trusts). They consider the use of such trusts to benefit disabled persons, and how best to protect the assets (typically an inheritance) as well as the right to collect government benefits and assistance."
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Henson Trusts - Episode #159
Posted on April 21, 2009 by Hull & Hull LLP
Sarah Fitzpatrick: Hello and welcome to Hull on Estates. You’re listening to episode 158 on Tuesday, April 21, 2009.
Welcome to Hull on Estates, a series of podcasts for the Canadian legal community dealing with issues and insights surrounding estate planning in Canada. Hosted by the lawyers of Hull & Hull, the podcast will touch on some key considerations when planning estates and wills. Now, here are today’s hosts.
Rick Bickhram: Hi and welcome to another episode of Hull on Estates. I’m Rick Bickhram.
Sarah Fitzpatrick: Hi and I’m Sarah Fitzpatrick.
Rick Bickhram: If you want to be heard on Hull on Estates, you can participate by leaving us a comment. Please e-mail us at hull.lawyers@gmail.com or you can visit our blog at estatelaw.hullandhull.com.
Well I believe this is the first time Sarah and I are podcasting. How are you doing today, Sarah?
Sarah Fitzpatrick: I’m doing well, Rick. How are you today?
Rick Bickhram: I’m not doing bad, I’m trying to enjoy the weather. Unfortunately today it looks like its raining so there’s only so much enjoyment you can have.
Sarah Fitzpatrick: That’s right, but it looks like the beautiful weather is just around the corner this weekend, so we can hope that spring is finally just around the corner.
Rick Bickhram: I know and I’m excited for it.
So today we’re going to be discussing trusts, more particularly we’re going to be focusing on the Henson trusts.
Sarah Fitzpatrick: That’s right. Today, Rick and I thought that we’d talk about a specific kind of trust that actually comes into play quite frequently in estate planning and it really concerns the type of trust when you are looking at a disabled beneficiary. And specifically, do you want to talk a little bit about what the Henson trust is designed to achieve, Rick?
Rick Bickhram: Well Sarah, I understand that the Ontario Disability Support Program - its exactly what it says it is. It’s a support program and the Henson trust is designed to prevent disentitling any beneficiaries who may be entitled to support under the Ontario Disability Support Program Act.
Sarah Fitzpatrick: That’s right. And we’ll call that the ODSP benefit, because we’re going to be mentioning that a lot during this podcast. And that’s right. Specifically it protects the assets, which in the context that we’re going to be referring to today, its typically an inheritance. And it protects those assets as well as the right to collect future government benefits. So not only it protects income but it also protects government benefits and assistance. So it basically is ensuring that the beneficiary, when they receive income from the trust - income or capital from a trust - that by receiving such income or capital, that they’re not going to be disentitled from any assets that they are receiving from the ODSP. Now essentially to qualify for ODSP benefits, there are certain exemptions. You can’t exceed certain benefits or you’ll be disentitled to those. So there are certain specific restrictions and specifically, Rick you can go through those restrictions right now. One of them, for example, is you cannot have assets valued at more than $5,000. You cannot receive gifts or other voluntary payments that exceed more than, I believe it’s $4,000. It may have been recently adjusted upwards to $5,000 over a 12 month period. There are other exceptions as well.
Rick Bickhram: I understand those exceptions to be, well first of all, this is when we’re calculating the value of the person’s assets.
Sarah Fitzpatrick: That’s correct, that’s right.
Rick Bickhram: And the person being the beneficiary of the ODSP entitlement. So when we’re valuing the assets, some assets that will be considered exempt in determining what your total assets are, a principal residence, I think there are public policy reasons why a principal residence may be exempted.
Sarah Fitzpatrick: That’s right. And just to clarify on that principal residence, the value of that has no bearing on it whatsoever. It can be valued, for example, at $100,000 or it can be valued at $2,000,000 but if the disabled beneficiary does own a principal residence, that is not considered part of the calculation when determining whether you’re eligible for the ODSP benefit. So that’s right. And so what are some of the other assets that are not included in the calculation of the value of assets under the general rule?
Rick Bickhram: A second property. Apparently the beneficiary may be entitled to a second property if approved for the health and well-being of the recipient. A third item that is exempt from the calculation of assets if a motor vehicle. And as Sarah described with the principal residence, there is no value of this vehicle that the beneficiary may be cut off at. So he could be driving a Hyundai or he could be driving, I don’t know, what’s a good car nowadays? A Bentley?
Sarah Fitzpatrick: And that’s right. And there’s one further thing there as well. A pre-paid funeral of any value. So all of those items essentially aren’t going to be included in the calculation. There is one other important exception as well. The disabled beneficiary can also have a vested interest in a trust provided that the assets in that trust do not exceed $100,000. And that can be an inter vivos trust or a testamentary trust. But that cannot exceed $100,000. So then we’re left with the situation where you have these specific exemptions that we’ve just discussed. Perhaps you have assets that will exceed the $100,000 mark and you’re trying to determine how you can gift these assets, perhaps in your Will or as we said, it can be an inter vivos trust as well. How do you gift those assets to the beneficiary without disentitling them to the ODSP benefits? And that’s where the nature of this Henson trust becomes critical and the use of a Henson trust can actually benefit the beneficiary so they can actually maintain their ODSP benefits.
Rick Bickhram: That’s correct Sarah. And I believe what a Henson trust is essentially, it’s a completely discretionary trust and there’s two points on this discretionary trust that are looked at. And I like to refer to them as the “when” and “how much”. In this completely discretionary trust, the trustees have complete discretion as to when to make a distribution. So again, that’s time. And how much, as to the quantum of the distribution. How much are they going to distribute to the beneficiaries? Again, those two points must be absolutely in the trustee’s discretion to be characterized as a Henson trust.
Sarah Fitzpatrick: That’s right and if it doesn’t include that absolute discretionary nature, then it’s not going to be considered a Henson trust. So the absolute discretionary nature means as Rick said, it’s not only the quantum, how much can be distributed. It’s timing. So essentially its going to empower your trustee or your trustees to distribute little or even none, arguably none. So what that creates then, what that trust creates is it creates no vested interest whatsoever in the beneficiary. So the trustee, because they’ve got this discretion, the beneficiary cannot claim that they have any absolute entitlement to the funds. They have no vested interest whatsoever. So arguably the trustee could distribute none of the income or none of the capital at any time throughout the lifetime of the trust, for the benefit of the trustee. Now that brings up an important point because of this all-encompassing discretionary nature of the trust. You want to make sure that you’ve got absolute, complete faith in who you choose as your trustee because there is, obviously, the potential for abuse.
Rick Bickhram: I have a question for you, Sarah.
Sarah Fitzpatrick: Sure.
Rick Bickhram: Let’s say that I am setting up, I’m designing a trust, a Henson trust.
Sarah Fitzpatrick: Right.
Rick Bickhram: And I have 2 children. One of my children is disabled and so I’m looking out for the disabled child’s benefit. I create the Henson trust. And I name my second child, who is not disabled, as the trustee.
Sarah Fitzpatrick: Right.
Rick Bickhram: What type of conflict could you see arising from that?
Sarah Fitzpatrick: Yeah, that’s a really good point because when you’re choosing your trustee, often in this type of a context, you’ve got the testator that says well I’d really like to appoint my other child because that’s the individual in whom you might have the most trust. And also it’s a good idea to have somebody that’s around the same age, perhaps as the disabled beneficiary or younger than, because this trust is going to be designed to last throughout the lifetime of the beneficiary. So the potential conflict there, if you do appoint a sibling, an important provision in this trustee is going to be your residual beneficiaries. And you’re going to have to have somewhere in that trust provision for where the capital of the trust is to go when the beneficiary passes away. And most likely you’re going to have that going to your other children. So you can see right there that that’s got to be very carefully considered because that can be a very powerful conflict of interest if you have one disabled child and you’ve got a Henson trust set up for them and you’ve got the other child as the trustee of the trust, and they’re also the residuary beneficiary of the trust. That’s obviously going to be a pretty powerful conflict so you’ve obviously got to keep that in mind as well.
I think other issues we can maybe touch a little bit on, there was an important case where they considered what happens with income as opposed to capital. In that case, the alleged Henson trust had all the income actually being distributed out to the disabled beneficiary. And the Court actually found that that precluded that from being a Henson trust because there was a vested interest in the income. So its really important when you’re drafting this kind of trust as well to have regard to where that income is going and you want to make sure that there’s a provision to distribute none of the income to the disabled beneficiary and perhaps sprinkle it amongst someone else, some other beneficiaries as well. So there’s all kinds of things that need to be considered when you’re looking at this Henson trust but it can absolutely be a really vital estate planning tool in the appropriate context.
Rick Bickhram: I think that brings us to an end of this week’s discussion. Thanks for listening and thanks for joining me today, Sarah.
Sarah Fitzpatrick: It was a pleasure, Rick. And I look forward to podcasting with you again soon.
Rick Bickhram: And we look forward to hearing from our listeners. You can send us an e-mail at hull.lawyers@gmail.com. Be sure to visit our blog at estatelaw.hullandhull.com where you’ll find even more information and discussion on today’s practice of estate law. We hope that you enjoyed the show. I’m Rick Bickhram.
Sarah Fitzpatrick: And I’m Sarah Fitzpatrick. Until next week, so long.
This has been Hull on Estates with the lawyers of Hull & Hull. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.
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