If your son or daughter is on ODSP (Ontario Disability Support Program), there is only so much money they can receive from other sources before their ODSP benefits are jeopardized. That includes money withdrawn from a Henson Trust.
There is no limit to the amount of money that can be held in a Henson Trust, but your child on ODSP is not allowed to receive more than $10,000 in a 12-month period to cover “Non-Disability Related Expenses”.
While you, the parents, are alive, it is relatively easy to cover the cost of non-disability related expenses for your adult child. You pay for those expenses yourselves. If your daughter needs a coat, you buy her a coat. Technically, you are giving them money when you buy that coat, however ODSP doesn’t have a mechanism to track that expense and apply it to the $10,000 limit. If the money comes from a Henson Trust to cover the cost of the coat it is a completely different story.
Money disbursed from a Henson Trust
Money disbursed from a Henson Trust must be reported to ODSP. ODSP will want to know how much money is withdrawn from the trust, when it is withdrawn, and how that money was used. If the money was used for disability-related expenses, there is no issue. If the money is used for non-disability related expenses it becomes an issue if ODSP suspects your child has received more than $10,000 in the past 12 months, which includes money not only coming from the trust, but also from many other sources, such as monetary gifts from friends and family. Exceed the $10,000 limit and the person’s ODSP is jeopardized.
You want your child to lead a good life after you have passed away, which includes covering expenses that are not disability-related. How can this be done with this $10,000 limit is in place? While money from a Henson Trust is subject to the “$10,000 rule”, money taken from a Registered Disability Savings Plan (RDSP) is not.
In addition to the generous government contributions, any money in an RDSP does not impact your child’s ODSP eligibility. What’s more, the money withdrawn from an RDSP will not affect your child’s ODSP, unless the withdrawn money is held onto for an extended period of time in a regular bank account or a different type of investment (a discussion for another time). Any amount taken from an RDSP account can be used for almost any purpose.
You are allowed to contribute up to $200,000 to your child’s RDSP, but you don’t need to deposit near this amount in order to maximize government contributions. For many people, $30,000 spread out over the course of a number of years is all it takes to collect all the government contributions. So why contribute more than that?
While the contribution limit into an RDSP account is $200,000, there is no limit on the account value. It does not matter how much the RDSP account value grows to; only the contributions are capped.
If your child is eligible for the maximum RDSP government contributions and you contribute $1,500 each year, the government will provide a matching Grant contribution of $3,500 and a $1,000 Bond contribution. After 20 years of contributions, you will have contributed $30,000 and received $90,000 from the government. If the account earns a 6% annual rate of return, there should be approximately $400,000 in the RDSP when it is accessible without any government penalties. It takes approximately 30 years after an account is opened before the money can be touched without penalty, if government contributions are maximized each year.
$400,000 feels like a lot of money. It is, today. It won’t feel as much in 30 years. It used to be that $100,000 felt like an immense amount of money. Today, $100,000 is a nice sum, but it doesn’t feel as large as it used to be. Inflation is the culprit.
If we peg inflation at 3% a year, in 30 years $400,000 will feel like $165,000 does today. Now that is nothing to turn your nose up at, but you have to think about it this way. In 30 years, $400,000 will buy you the same amount of goods and services $165,000 will buy you today. If your son or daughter will need that money for 20 years or longer after they start making withdrawals, you can’t expect it to last that long unless the money is managed quite frugally.
Making a significant lump sum contribution to the RDSP early on can make a world of difference over the long run. Here is an example.
Charlie is on ODSP and is 20 years old. He lives with his parents. His parents open up an RDSP in 2016. If they deposit $1,500 a year for 20 years and earn a 6% annual rate of return, there will be approximately $400,000 in his RDSP the year he turns 50, which is when he can access the money without penalty. However, if in the first year when they open the account, Charlie’s parents contribute $171,500 and then contribute $1,500 for each of the following 19 years, there will be approximately $1.375 million to draw upon without penalty when Charlie is 50 years old.
Not only does Charlie have more than three times the amount of money in his RDSP, but he also has three times the amount of money that can be used for any type of expense without impacting his ODSP eligibility. Charlie’s standard of living will be better and the trustees of the Henson Trust will have an easier time of it as well. Instead of worrying if they are under or over the $10,000 limit, they will have the option to turn to the RDSP to cover non-disability related expenses.
If you have money you have set aside for your child’s Henson Trust, you may want to consider depositing it into their RDSP account. It will provide a great deal more flexibility when it comes time to cover expenses after you are gone.