Trusts for a Beneficiary With a Disability and ODSP in Ontario

A family member who receives ODSP is named in a will, or a parent is worried about leaving money to a child with a disability. The question is usually the same: will the inheritance cause benefits to be reduced or stopped, and can a trust prevent that?

There is no single answer, because the result depends on the wording of the trust, who controls it, and how ODSP treats the money. This article explains the general building blocks so you can ask better questions of ODSP, a lawyer and an accountant.

Why an inheritance and ODSP need careful planning

ODSP is a needs-based program, which means a person's income and assets matter to their eligibility. A lump-sum inheritance paid straight to the person can therefore raise questions about their benefits. The specific limits and how particular kinds of trusts are treated are set by the program, and they can change, so check them directly with ODSP and a lawyer before relying on any plan.

For that reason, families often look at holding the money in a trust instead of paying it outright. A trust separates who legally holds the money (the trustee) from who benefits from it. Whether that separation is enough for ODSP purposes depends on the details.

What a trust can and cannot do

A trust is governed by its terms, usually found in a will or a trust document. Those terms decide who the trustee is, what the trustee may pay out, and when. A trustee has real duties: they must invest trust property with the care, skill, diligence and judgment of a prudent investor.

• Discretion: some trusts let the trustee decide whether and when to pay anything, while others require set payments. This difference can matter a great deal to benefit programs.
• Who can access the money: if the beneficiary can demand the funds, ODSP may treat them differently than if only the trustee decides.
• Choice of trustee: a trustee needs to be someone reliable who understands the beneficiary's needs and the benefit rules.
• Backup plans: the trust should say what happens if the trustee dies or cannot act.

A trust that is poorly worded can fail to do what the family intended. A lawyer can review the wording against the current ODSP rules.

How the tax side works

Trusts are taxed differently from individuals. Since 2016, only graduated rate estates and qualified disability trusts are taxed at graduated rates, and other testamentary trusts pay the top rate. An estate stops being a graduated rate estate if it still exists 36 months after the death.

A trust may deduct income that became payable to its beneficiaries in the year, so that income is taxed to the beneficiary rather than the trust. Trusts other than spousal trusts also face a deemed disposition of their capital property every 21 years.

Whether a particular trust qualifies as a qualified disability trust is a tax question worth putting to an accountant.

If the beneficiary cannot manage money

Some beneficiaries cannot manage property themselves. If there is no continuing power of attorney covering all of their property, anyone may ask a capacity assessor to assess their capacity to manage property. If the assessor issues a certificate of incapacity, the Public Guardian and Trustee becomes the person's statutory guardian of property. The person must be told they can apply to the Consent and Capacity Board for a review.

A spouse, partner or relative may apply to the Public Guardian and Trustee to replace it as guardian, using Form 1 with a management plan on Form 2. Someone else can instead apply to the Ontario Superior Court of Justice to be appointed guardian of property. A guardian is a fiduciary and must act diligently.

If the beneficiary is a child, a parent is not automatically entitled to manage the child's money; that authority comes from a court order appointing a guardian of property. Naming a trustee in the will can avoid many of these problems.

What to do next

• Find out how the beneficiary's benefits are treated, and ask ODSP in writing what it needs to know about an inheritance.
• Gather the will or trust document and read who the trustee is and what powers they have.
• Do not pay an inheritance directly to the beneficiary until you have advice.
• Ask a lawyer whether the trust wording works with current ODSP rules.
• Ask an accountant how the trust will be taxed and who files its returns.
• Keep records of every payment the trustee makes.

Frequently asked questions