Estate planning for beneficiaries with a disability

Estate planning can be complex, but even more so when it involves a beneficiary with a disability.

This type of planning can mean setting aside additional funds for an individual with a mental or physical disability, especially if they can’t earn an income, while also ensuring they don’t lose any of the government benefits available to help support them.

In some cases, caregivers who are looking after individuals with a disability want to ensure that the individual is financially secure and has someone to look after them when they pass away or become incapacitated.

“It can be an overwhelming issue for-the primary caregivers of an individual with a disability,” says Jag Gandhi, vice-president of wealth planning at Gluskin Sheff.

Building an effective plan

A successful estate plan for disabled beneficiaries starts with finding an experienced, trustworthy team of legal and financial advisors with whom you can explain your beneficiary’s needs, mental capacity and entitlement to government assistance, where applicable. This support system will help to ensure you’re using the most suitable programs and structures based on your unique circumstances and that assets are transferred to your disabled beneficiary in a manner that would best benefit them.

“When we’re doing this type of planning, it’s important to realize that disabilities can take many different forms and can range from mild to severe,” Gandhi says. “We really need to understand the disability, and the scope and the breadth of the disability, and what we’re planning for, because that’s going to play a significant part in the type of planning that’s most effective.”

For instance, Gandhi says it’s important to know the beneficiary’s sources of income and if they qualify for the federal disability tax credit (DTC), which is a non-refundable tax credit that helps individuals with disabilities or those who support them, reduce the amount of income tax they may have to pay. The DTC is intended to provide more tax equity by providing some relief for disability costs that other taxpayers don’t have, such as the need for a wheelchair or other accessibility products and services.

Eligibility for the DTC can also lead to other federal, provincial or territorial programs such as the registered disability savings plan (RDSP), the Canada workers benefit disability supplement, and the child disability benefit.

Some may also qualify for provincial benefits such as the Ontario Disability Support Program (ODSP) in Ontario, which is income support for people with disabilities to pay for living expenses like food and housing. Once the individual qualifies under a provincial income support program, they could also then qualify for various other provincial support programs like health benefits for drug and dental coverage and disability-related benefits.

Whether the individual with the disability is capable of making their own financial decisions, or whether they need a power of attorney for property or whether a guardian of property by a court needs to be appointed once the individual turns 18, also plays a significant role in how the estate plan is set up, Gandhi says.

According to Gandhi: “From an estate planning perspective, you really need to understand the disability, the limitations and the support that’s required to manage that disability from day to day. It’s a lot of information, but it’s critical information in the planning process”.

Using trusts for disabled Individuals

A trust can be an inter vivos trust, which is established during one’s lifetime, or a testamentary trust, which is established on death.

A common trust structure many people use for individuals with disabilities is a Henson trust, which gives trustees full discretion of how to distribute the income and/or capital of the trust funds and can be either inter vivos or testamentary. If it’s a testamentary trust, the trust could also jointly elect with the qualifying beneficiary to be designated as a Qualified Disability Trust (QDT), where a qualifying beneficiary is eligible for the DTC. The QDT was established in 2016 as an exception to the rules that all testamentary trusts are taxed at top marginal rates. Therefore, income earned and retained in the QDT would be taxed at the graduated rates.

While both trusts can be useful in planning, there are some differences to note, Gandhi says. For instance, an individual with a disability can have more than one Henson trust, but can only elect one testamentary trust as a QDT for each taxation year. For instance, if the parents of a individual with a disability are divorced and have each created a testamentary trust under their respective wills for their disabled individual, and the individual qualifies for a DTC, only one of the testamentary trusts can be elected as a QDT in a given year of taxation.

Unlike the QDT, the individual with a disability is not required to qualify for the DTC in order to be named as a beneficiary under a Henson trust. The main feature of a Henson trust is that the beneficiary has no vested interest in the income or capital of the trust. This means the individual cannot claim or demand payment from the trust and are not considered to own the trust assets. Most provinces have held that a Henson trust is not an asset for purposes of their disability support programs.

“Trusts can be useful planning tools for individuals with disabilities, but there are many important considerations that should be fully explored with a qualified professional,” Gandhi says.

Ways to use insurance

Insurance can also play a role in helping support beneficiaries with a disability, says Jonathan McMurrich, senior wealth planner at Gluskin Sheff.

Caregivers may wish to use insurance policies to ensure that in the event of their own disability or death, that there are financial resources available to continue supporting the ongoing needs of the disabled individual.

“It’s prudent, particularly when dealing with a disabled person, to think about what the day-to-day financial requirements are going to be.” He says the insurance options also need to reflect the needs and financial situation of the beneficiary.

“If there is a situation where the disabled individual qualifies for government support programs, it’s important to make sure any insurance proceeds are structured in a way that would not disqualify them for those benefits,” McMurrich adds.

Having the caregiver conversation

Another consideration is who will take care of the person with a disability when the primary caregiver passes away. McMurrich says that includes both caregiving duties, for those who can’t take care of themselves, as well as who will oversee their financial affairs.

The decision on who will care for the individual with a disability could also determine how to fund their future care, McMurrich adds. He says there could be different costs if they need to be moved to a health care facility, or if they receive in-home care.

Start the conversations early

McMurrich says families need to have these conversations early and often, especially as family situations change.

“It’s important in these types of situations that people work with qualified financial and legal advisors, including licensed insurance advisors, to ensure that they’re making the right choices for their loved ones,” McMurrich says.

Talking to advisors about these issues can be especially tough for caregivers looking after an individual with a disability, Gandhi adds.

“It’s hard for caregivers to think about a time when they’re not going to be around and to think about what is going to happen to the individual with a disability: Who’s going to take on the responsibility?” Gandhi says. “Part of our role as advisors is to help families think through the process and to really make them aware of what’s in the best interest of the individual. At the end of the day, that’s what matters the most.”