Henson Trusts and ODSP in Ontario: Protecting an Inheritance

When someone who receives the Ontario Disability Support Program (ODSP) is left an inheritance or life insurance money, the money can affect their benefits. A trust set up the right way can avoid that.

This article explains how ODSP treats a Henson trust, how it differs from other inheritance trusts, and what trustees should know about payments, taxes and investing. It is general information, not advice on your situation.

What a Henson trust is and how ODSP treats it

A Henson trust is another name for an absolute discretionary trust. The trustee decides whether, when and how much to pay to the beneficiary. The beneficiary cannot demand money from it. That lack of a right to payment is what makes it different from other trusts.

Under ODSP rules, a true absolute discretionary (Henson) trust is not counted as an asset, no matter how much capital it holds.

The word "true" matters. ODSP reviews each trust's terms individually, so results vary with the wording of the document. A trust that is called a Henson trust but gives the beneficiary a right to the money may not be treated the same way. Wording should be checked carefully when the trust is drafted.

How payments out of the trust are treated

A payment from a Henson trust is treated as a voluntary payment under ODSP, because the trustee decides whether to pay and has no obligation to do so. Whether that payment reduces benefits depends on what it is used for.

• Payments used for disability-related items or services approved by the Director, or for approved disability-related education or training expenses, are fully exempt.
• Other trust, life insurance, gift or voluntary payments are exempt as income only up to $10,000 in any 12-month period, and amounts above that limit count as income in the month received.

The $10,000 limit comes from the regulation as it read when this was written. Rules and limits can change, so confirm the current figure in the ODSP regulation or with a lawyer before relying on it. Trustees often pay a provider directly for approved items, and keeping receipts and records makes it easier to show what each payment was for.

Henson trusts compared with other inheritance trusts

Not every trust for a person on ODSP is discretionary. If the trust's capital comes from an inheritance or life insurance proceeds and is available for the recipient's maintenance, the beneficial interest is exempt only up to a combined $100,000, together with the cash surrender value of life insurance.

For a larger inheritance, this difference is often the main reason families consider a Henson trust. For a smaller amount, the right structure depends on the trust's terms and the person's circumstances.

Money received directly, and a recipient's own funds

Sometimes the money reaches the ODSP recipient before a trust exists. A recipient who receives an inheritance or life insurance money directly may be given up to six months to put it into a trust, provided the trust is set up as soon as possible. Otherwise the money is treated as income in the month it is received.

There is a firm limit. Members of an ODSP benefit unit cannot put their own money, or money they are entitled to, into a private trust and have it exempted. A Henson trust is generally funded by someone else, often through a will or a life insurance designation, not by the recipient.

Tax and trustee duties

A trust's taxable income is generally taxed at the highest individual rate, but graduated rate estates and qualified disability trusts are excluded from that rule. A testamentary trust that arose on a death can be taxed at graduated rates as a qualified disability trust if it jointly elects with one or more beneficiaries on Form T3QDT and meets the other conditions. An accountant can explain whether that fits a particular trust.

The trustee also has investment duties. In investing trust property, a trustee must use the care, skill, diligence and judgment of a prudent investor. A trustee must consider listed criteria when planning investments, must diversify to an appropriate extent, and may obtain investment advice.

A trustee is not liable for an investment loss if the conduct that led to it followed an investment plan or strategy that a prudent investor could adopt. Writing down the plan and the reasons for it is a sensible habit.

What to do next

• Tell the ODSP recipient or their representative not to accept or spend a large lump sum before getting advice.
• Find out whether the money is coming through a will, life insurance or another source, and who the named trustee or beneficiary is.
• Have a lawyer review any proposed trust wording, since ODSP reviews each trust individually.
• If money has already been received directly, act quickly, because the window to put it into a trust is limited.
• Keep records of every payment and what it was for.
• Ask an accountant about T3 filing and whether a qualified disability trust election applies.

Frequently asked questions