Jeanette was 36 when her father died.

It had been a tough year for Jeanette.  After her father passed away, she had to set up a Henson Trust for her older brother, Darrell.  She didn’t expect her role as trustee – and everything else that came with it – would be so difficult.

Today, her brother lives on his own in a rented apartment and works about 10 hours a week at a neighbourhood bakery.  As Jeanette puts it, Darrell has a real life.  A life she didn’t think would have happened, if it wasn’t for her parents, especially her dad.

Darrell, six years older than Jeanette, was born with a developmental disability.  When he was an infant, doctors said they should put him in a home, but her parents refused.  They said he would never be able to have a normal life or take care of himself.  His parents were determined to prove them wrong.  Jeanette seemed equally determined to honour their legacy.

When we first met, Jeanette confessed she never really thought about what life would be like after her father was gone.  After her mother died of cancer 20 years earlier, so much of her father’s time and energy was eaten by work and looking after her older brother, leaving little time for her.  She was 16.  Her brother was 22.  Life was messy and difficult.  She was angry with her father, “tested his patience” and resented her brother. But over time, as she gained her own independence, she recognized the demands her dad had to face as a single parent.

Many days, Darrell would walk the 20 minutes from his apartment to his father’s house.  Their father, Allen, helped Darrell with the less routine aspects of life.  He managed Darrell’s medical appointments, filed his taxes, went with him to shop for clothes, and a whole host of other things.  He also helped him, financially.

Darrell has been receiving income assistance from the Ontario Disability Support Program (ODSP) for many years. Since the money from ODSP and his income from his job was never enough to cover his basic monthly expenses, his father always covered the shortfall.

Even though ODSP limits the amount a person on ODSP is allowed to receive in gifts, Allen was able to help Darrell without any issues.  He covered the cost of Darrell’s cellphone, cable and internet bills, regularly bought him groceries, paid for larger ticket items, including the TV and all the furniture in his apartment, and routinely provided him with pocket cash.

In an effort to protect his son’s ODSP benefits after he died, Allen left 75% of his estate in a Henson Trust for Darrell and appointed Jeanette as trustee.  Allen understood Darrell could not directly inherit such a significant amount of money without losing his ODSP benefits.

Several years before he died, Allen explained the purpose of the Henson Trust to Jeanette.  She understood the money left in the trust for Darrell wouldn’t affect his government benefits because ODSP treated the trust as an exempt asset.

Jeanette had a strong bond with her brother and cared deeply for him.  She understood it would be her responsibility to manage the money in the trust and provide Darrell with what he needed ODSP wouldn’t cover.

She also wanted to do right by her father.  “I want my father to be proud.  I want to make sure Darrell has what he needs, just like my dad did when he was alive.  I’m not perfect.  My dad wasn’t either and he never expected me to be.  But I understood he needed me to take my role as trustee seriously and ensure Darrell had what he needs.”

I met Jeanette for the first time almost a year after her father died.  She was looking for help with managing the Henson Trust.  There were important aspects of managing her brother’s Henson Trust she didn’t understand.  In fact, several key aspects weren’t even on her radar.

She described her efforts to set up and manage the trust as a series of frustrating events, mistakes, misinformation, and unfortunate decisions that felt like personal failures.  After some time, she realized the advice from her bank was misguided.  Even her father’s lawyer who drafted his will couldn’t give her the guidance she needed.

Jeanette even admitted to being angry with her father.  He explained she would be the trustee of the trust, but failed to explain what she needed to know.  She figured he didn’t anticipate the issues she has been dealing with, but why didn’t he have a better understanding?  Couldn’t he have made it at least a bit easier for her?

When she reviewed her father’s will, she realized it did not include specific instructions for setting up the trust.  She wasn’t sure where to start.  She spoke to her father’s lawyer who said her financial advisor or bank should be able to help her.

Jeanette didn’t have a financial advisor.  She managed her own investments online.  She went to her bank and sat down with one of their representatives who said they could help her.  In the end, they set up an informal trust account for the Henson Trust.

Several months after the account was in place, she had reason to call Darrell’s ODSP caseworker.  It was the first time she had any contact with ODSP.  Her father managed Darrell’s ODSP benefits.  She didn’t realize she would have to take over that responsibility – not until after she made that first call to Darrell’s caseworker.

Jeanette introduced herself to the ODSP caseworker, explaining she was calling instead of her father because he had passed away.  Before she could explain the reason for her call, the caseworker asked a string of questions about her father’s estate and if Darrell received an inheritance.

The caseworker instructed her to provide various documents, including a copy of her father’s will, a detailed statement of the trust account itemizing every transaction, details of how the money withdrawn from the account was spent, receipts for the expenditures, and statements for Darrell’s bank account and any other accounts he may have.

Jeanette was stunned.  She asked why would ODSP need all this information since a Henson Trust was an exempt asset?  And that was when Jeanette learned she had been walking blind for months, ever since she became trustee.  In her mind, she had messed up.

Her father told her the Henson Trust protect her brother’s ODSP.  He wasn’t wrong.  ODSP would treat assets in the Henson Trust as exempt.  He just didn’t realize there was more to the story.

Here is what Jeanette did not know about Henson Trusts and as it relates to ODSP:

HENSON TRUST: WITHDRAWAL RESTRICTIONS

Yes, any assets in a Henson Trust, regardless of the value of those assets, are considered exempt by ODSP.

Money withdrawn from the trust is something different.

An ODSP recipient is allowed to receive up to $10,000 in a 12-month period in the form of gifts and “voluntary payments”.

Money received from various sources are considered voluntary payments, including money from trusts.  Withdrawals from Darrell’s Henson Trust plus gifts and voluntary payments from other sources are limited to $10,000 in a 12-month period.  Any amount in excess of the $10,000 limit would be considered income in the month it is received.

EXCEPTIONS TO THE $10,000 LIMIT

There are several exemptions to the $10,000 limit on gifts and voluntary payments. Here are some examples:

• First and last month’s rent necessary to secure accommodation. Darrell is living in a rented apartment.  If he needs to move at some point, money taken from the trust to cover first and last month’s rent would not be considered a part of the $10,000 limit.

• Education and training expenses that would not be reimbursed from other sources.

• The purchase of an ODSP exempt asset, such as a primary residence or exempt vehicle. An ODSP recipient is allowed to own a vehicle and their primary residence without compromising their ODSP eligibility.  At some point, it might make sense to buy a condo and for Darrell. Money could be taken from the trust to pay for the condominium. Alternatively, instead of Darrell owning a condo in his name, a condo could be held in the trust.

• Money can be transferred from the Henson Trust to another exempt asset. For example, money transferred from the trust to Darrell’s Registered Disability Savings Plan is not subject to the $10,000 limit.

REPORTING TO ODSP

Once a year, Jeanette must provide ODSP with a report detailing the use of the money from the trust.  For each withdrawal from the trust, the report should include:

• The amount of each withdrawal from the trust
• The date of each withdrawal
• Details of the items and services purchased (receipts should be kept)
• Identify each expense as either disability-related, non-disability-related, or an exempt asset

Even though Jeanette must submit the report once a year, ODSP has the discretion to request the above information at any point in time.

FORMAL TRUST ACCOUNTS ARE A MUST

When we met, the account Jeanette set up at the bank for the Henson Trust was an informal trust account.  This had to be reversed.

In an informal trust account, any income it generates (interest, dividends) would be taxed in Jeanette’s name.  Jeanette’s tax bill would increase by thousands of dollars.

An informal trust account also raises ODSP-related issues.  A Henson Trust is an absolute discretionary trust where the trustee has absolute control of the assets and the beneficiary does not have access to those funds.  Technically, Darrell could access money in the account, independently.

Unless the beneficiary of an informal trust is a minor, he has the same legal rights to access and control the funds in the account as the trustee.  This access tacitly invalidates the absolute discretionary character of a Henson Trust, which is necessary to be treated as an exempt asset by ODSP.

Accounts set up under the terms of a Henson Trust should be formal trust accounts.

TAX FILING

A tax return must be filed for the trust each year.

Jeanette should engage a tax accountant who understands how trusts are taxed and the options available to reduce tax costs.

While unrelated to the trust, Darrell’s taxes need to be filed each year as well.  Their father filed Darrell’s tax return, which was another responsibility Jeanette realized she would have to assume.

QUALIFIED DISABILITY TRUST TAX ELECTION

Prior to January 2016, testamentary trusts were taxed on a graduated tax basis.  As of January 2016, CRA began taxing testamentary trusts at the highest marginal tax rate.  One exception was made for Qualified Disability Trusts (QDT).

If the beneficiary of a testamentary trust has been approved for the Disability Tax Credit, the Qualified Disability Trust election can be made.  A QDT is taxed at a graduated tax rate.

Note: the election must be made each year and can be applied to one trust, only.

MANAGING ASSETS IN THE TRUST

Jeanette had some experience managing her own investments, but she didn’t feel comfortable managing the assets in the trust entirely on her own.  The amount of money in the trust was much more than she managed for herself.  Also, she wasn’t going to touch her own savings for many years.  Since she needed to draw from the trust on an on-going basis, she wasn’t sure how best to invest the money.  She wanted an experienced advisor on board to help her.

A trustee has a duty to manage the assets in the beneficiary’s best interests and decisions should be in line with the “prudent investor” rule. Essentially, the prudent investor rule requires trustees to consider the beneficiary’s short and long-term needs, market and economic conditions, investment risk, inflation and other factors.

Legally, Jeanette could be held personally responsible for loses, if she mismanaged the assets in the trust.

An investment policy statement should be drawn up, outlining the investment strategy and the rationale for the strategy, based on the beneficiary’s financial circumstances, current and long-term needs, recognizing needs may increase over time.

PRACTICAL MATTERS

On a practical note, in addition to a formal investment trust account, a chequing account set up under the terms of the trust is also needed.

Withdrawals from an investment account can’t be made out to the trustee or another third party.  A financial institution can’t direct a redemption from a formal investment trust account to Jeanette, Darrell’s landlord to pay his rent, or the internet provider he uses.

Withdrawals from the investment account can be directed to the beneficiary of the trust or to another account set up under the terms of the trust.

Money transferred from the investment account to the chequing account can be accessed by the trustee through cash withdrawals or using cheques associated with the account.

FINAL THOUGHT

Henson Trusts are vehicles, but they do not run on autopilot.  The transfer of wealth into such a trust is the proverbial passing of the baton of significant responsibility.  But it is only the initial step.  Trustees like Jeanette need to be informed and require professional advice to execute their responsibilities, effectively.  Without the proper advice and an understanding of how to manage a Henson Trust, trustees are left flying blind.