What Is a Spendthrift or Discretionary Trust and Can Creditors Reach It in Ontario?

A discretionary trust lets the trustee, not the beneficiary, decide whether and when money is paid out. A spendthrift-style trust is meant to stop a beneficiary from simply spending what they are due. Whether creditors or a bankruptcy trustee can reach either one depends on the trust's wording, who funded it and when, so a lawyer should review the details before you rely on it.

Timing matters. Under the federal Bankruptcy and Insolvency Act s. 96, a court can void a transfer at undervalue to someone not dealing at arm's length if it was made within one year before the initial bankruptcy event, or within five years before if the debtor was insolvent or intended to defraud, defeat or delay a creditor. Stricter conditions apply to transfers to arm's-length parties. So a parent who is already in financial trouble cannot assume that moving assets into a trust will hold up.

If your child receives ODSP, a true absolute discretionary (Henson) trust is not counted as an asset, but a payment from it is treated as a voluntary payment. People in an ODSP benefit unit cannot put their own money into a private trust and have it exempted. Trust wording is reviewed case by case, so results vary.