How to Protect Benefits and Build a Legacy for Disabled Beneficiaries
AUTHOR: PAULINA PENA
“How do I ensure my disabled child benefits from my inheritance, while also qualifying for disability benefits?” is a common question amongst some of our clients at Bluestar.
While our team of legal and accounting professionals provide guidance and help formulate a strategy catered to each client, it is imperative they weigh the pros and cons of each option prior to making a decision, especially one that affects disabled beneficiaries.
Below, we’ve outlined some of the planning options we typically share with clients that are dealing with this type of scenario.
Planning Options for Families with Disabled Beneficiaries
- Registered Disability Savings Plan (RDSP): This is the cornerstone of government-support planning. With the help of generous federal disability grants and bonds, even modest annual contributions can grow into a substantial nest egg. Just as important, withdrawals from the RDSP do not generally reduce ODSP (Ontario Disability Support Program) eligibility further. At death, a parent can roll a portion of up to $200,000 of their RRSP (registered retirement savings plan) balance into the child’s RDSP without triggering taxes.
Strategy: By contributing roughly $1,200 annually for 20 years, you could receive the maximum Canada Disability Savings Grant of $70,000. The downside is that, by withdrawing income from an RDSP before age 60, a disabled beneficiary may need to repay the government a portion of the grants paid in the previous ten years, based on a complex formula.
But RDSPs are not the whole picture. Inheritance, life insurance proceeds, and retirement savings often exceed the ODSP limits. For those assets, a specialty class of trusts, created separately or through one’s will, provides the necessary protection.
- Henson Trust: This is a discretionary trust in a will where the trustee has complete control over asset and income distributions to the benefit of a disabled beneficiary. It can be created during lifetime and takes effect at death. Due to the beneficiary having no control of the assets, they are not counted against ODSP’s asset test or income limit.
- Qualified Disability Trust (QDT): Introduced in 2016 as an exception to the new tax rules governing testamentary trusts, a QDT is the only testamentary trust that qualifies for graduated tax rates on an ongoing basis, aside from the estate itself in which at most last three years. In other words, it is one of the only other trusts that qualifies for lower tax rates. This exception exists to support those beneficiaries living with disabilities.
- Lifetime Benefit Trust (LBT): A type of testamentary trust designed as an estate planning tool for children with mental disabilities who were financially dependent on the deceased individual and which may permit tax deferred treatment including rollovers. For a child living with a mental disability, parents can use a Lifetime Benefit Trust (LBT). RRSP or RRIF money can be transferred into the trust without immediate tax when the parent dies. The money is used to provide a lifetime of income for the child, taxed at the child’s lower rate. However, the income must be carefully managed so it does not negatively impact government benefits like ODSP or the CDB.
Integrated Solutions to Meet the Needs of our Clients
So here’s what we tell clients that are facing similar concerns relating to their disabled child/beneficiary inheriting a portion of their estate while also qualifying for disability benefits.
The truth is there is no one-size-fits-all solution. Our team carefully crafts plans based on our clients’ specific needs, goals, assets, etc.
For one of our clients, we crafted a layered plan which included him contributing to an RDSP for his disabled son. This ensured that he was able to capture maximum grants and bonds over twenty years of contributions. He was also advised to roll over $200,000 of his RRSP/RRIF assets into the RDSP through his will to avoid full taxation of these proceeds at his death.
Additionally, we proposed a testamentary Qualified Disability Trust (QDT) which would hold his son’s inheritance share of the estate on his behalf, providing the protection of a Henson Trust while also allowing for graduated tax rates and income-splitting.
We also recommended a Lifetime Benefit Trust in our client’s will for his disabled son. This allowed some of our client’s RRSP money to be transferred tax-free into an annuity that pays his son for life. The payments would be planned carefully to meet income limits so his government benefits wouldn’t be affected.
Key Takeaways
The example provided above is just one of the instances of integrated solutions we provide to clients with similar circumstances. After consulting with Bluestar professionals, he no longer feared that the government benefits his disabled son depended on would be lost or negatively impacted. Instead, he has a legacy plan that preserves ODSP and CDB eligibility, maximizes government RDSP grants and bonds and creates a fair tax-efficient inheritance that will be effective throughout his son’s lifetime.
This is exactly what we pride ourselves in doing at Bluestar. We carefully analyze our clients’ financial and legal needs and concerns and craft structures to solve problems, leaving them with something far more important than a carefully devised plan; peace of mind.