If a member of your family is a person with a disability, you may wish to settle a disability trust to provide for their financial needs. You may wish to establish the trust during your lifetime (called an ‘inter vivos trust’), or on your death through your Will (called a ‘testamentary trust’). The money you put aside in the trust can be used for the individual’s housing, food, medical and other costs. However, in order to remain eligible for financial assistance and special services from the provincial government there are some restrictions and important considerations that must be observed.
An individual may choose to settle a disability trust during lifetime in order to safeguard assets and income for the beneficiary. This may also be required to preserve the individual’s eligibility for disability assistance, such as in the case of an unexpected inheritance that was not left ‘in trust’ for the person with a disability; this requires the Ministry of Social Development and Poverty Reduction to approve the trust agreement. It is important to note that this type of trust does not benefit from any favourable treatment under the Income Tax Act and, accordingly, all income retained within the trust (not distributed out to the beneficiary) will be taxed at the highest marginal tax rate. Therefore, an accountant should be hired to guide the individual as to how to minimize income taxes.
Many parents choose to establish a disability trust for their child in their Wills, as opposed to during lifetime. (These types of testamentary trusts are often referred to as Henson trusts, named after an Ontario Court of Appeal case, Ontario v. Henson (1987) 28 ETR 121, affirmed (1989) 36 ETR 192 (Ont. CA).) This may be because the parents may have multiple children whom they wish to treat equally in dividing their assets on death, or because they simply do not have sufficient wealth to put assets aside during their lifetimes for their child. Regardless of the reason, a testamentary trust may benefit from favourable tax treatment in the form of taxation at marginal tax rates for the first 36 months of the estate/trust if certain requirements are met. In order to receive these benefits as a ‘Qualified Disability Trust’ (“QDT”), the trust must be resident in Canada, the trust must elect jointly with the eligible beneficiary to be a QDT, the beneficiary must qualify for the federal disability tax credit, and the beneficiary must only choose one trust to be their QDT. If the Will also creates a purely discretionary trust (in which the beneficiary has no control over the trust assets), then it is also possible for the person with disability to maintain their entitlement to government disability benefits after the Will is reviewed by the Ministry of Social Development and Poverty Reduction.
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