Henson Trusts / Inheritance Trusts
What is a Henson Trust?
The Henson trust is often used in estate planning to deal with situations where there is a disabled beneficiary who is entitled to receive support payments from the Ontario Disability Support Program (ODSP).
There are three essential elements of a Henson Trust. They are: (i) that the trustee must have absolute discretion, (ii) that the assets of the trust do not vest in the beneficiary, and (iii) that there is a gift-over following the death of the beneficiary.
Due to the fact that a Henson Trust beneficiary has no vested interest in the assets, nor any right to demand that the trustee pay them from the trust, the beneficial interest in a Henson trust isn’t taken into account in determining an individual’s assets. As such, the beneficiary is not required to treat the trust assets as his or her own. Consequently, the Henson trust provides a method of providing much needed additional income to a disabled beneficiary without causing them to become ineligible for ODSP.
If you are planning to provide financially for a person with an ongoing physical or mental disability after your death, a Henson trust can preserve a beneficiary’s entitlement to government income support and other benefits, without inadvertently compromising them. It is important to understand the intricacies of these trusts, various benefits available to disabled persons, and the best way to structure trusts in the event that more than one person plans to leave funds in a Henson Trust for a disabled beneficiary.
When an ODSP recipient is entitled to an inheritance, and there is no provision in the will of the deceased for a Henson Trust, the ODSP recipient may have to choose between losing ODSP payments or disclaiming their inheritance. An Inheritance Trust may allow the beneficiary to keep their ODSP and receive their inheritance in a trust created after the testator's death. The size of the Inheritance Trust is limited to $100,000 under current Regulations.
If you think an Henson trust or Inheritance Trust may be the right solution for you or someone you care for, please get in touch by clicking the "Request Information" button, below.
What is a Family Trust?
The use of a Family Trust which is a trust that becomes effective during one’s lifetime, rather than on death, is a planning tool that may be a practical consideration to explore further in consultation with your estate planning lawyer, corporate lawyer and accountant.
The Income Tax Act currently allows for the use of family trusts to enable several advantages for tax and estate planning, including probate avoidance, income splitting in limited circumstances, multiplication of the capital gains exemption, creditor protection, business succession planning, privacy and flexibility. These trusts are often suggested for successful small business owners as a way to transition wealth to the next generation, especially when a business succession plan is not yet in place.
Timing is a crucial consideration prior to establishing the family trust, as there is a deemed disposition every 21 years of all capital property held in a family trust meaning all capital gains are then payable. Twenty-one years from the date of establishment of the trust is often the time the trust structure is designed to change, to avoid this taxable event. In planning the optimal time to implement a family trust, you will want to consider your age and the ages of the trust beneficiaries and add 21 years.
If you think an Family Trust may be the right solution for you or someone you care for, please get in touch by clicking the "Request Information" button, below.
Alter Ego / Joint Partner Trusts
What is an Alter Ego Trust?
Alter Ego and Joint Partner trusts are two further examples of inter vivos trusts. The value of all assets held in the trust at death are kept outside the probate process, reducing tax payable. Only the Settlor (in the case of an Alter Ego Trust) or the Settlor and Settlor's spouse (in the case of a Joint Partner Trust) can receive income and or capital from the trust assets. These trusts allow for a private distribution of assets on death. Unlike the family trust, there is no deemed disposition every 21 years.
These trusts are permitted under the Income Tax Act (Canada) (the "Act"). In the case of the Alter Ego Trust, the client is the Settlor, Trustee and Beneficiary for as long as you are alive. The reason it is called an Alter Ego Trust is because any assets transferred into the trust, or “settled into trust” are no longer held by you personally. Rather, the Trust holds the assets, and the client or “settlor” holds and handles them in the capacity of Trustee, for the Settlor’s own benefit. An Alter Ego Trust operates much like a will in that, while the Trust Deed must state that only the settlor is authorized to benefit from the trust assets during the settlor’s lifetime, the settlor determines who is to receive the trust assets after the settlor’s death.
In order to qualify as an AET and function properly under the rules in the Income Tax Act (the Act), the terms of the trust and the facts concerning the settlor must meet the following criteria:
The trust must be settled by an individual who is at least 65 years of age at the time the trust is created
The individual settling the trust and the trust itself must be resident in Canada, meaning that the trustee(s) and/or other legal representative(s) who exercise management and control over the trust must be resident in Canada;
The settlor must be entitled to receive all of the income generated by the trust during their lifetime; and
No one but the settlor is entitled to receive or otherwise use any of the trust’s income or capital during the settlor’s lifetime.
We strive to make the intergenerational transfer of wealth more seamless and to give clients peace of mind and control. If you want to discuss whether an Alter Ego or Joint Partner Trust would be right for you, please get in touch by clicking the "Request Information" button, below.