Setting Up a Trust for a Child With a Disability in Ontario

Parents of a child with a disability often worry that an inheritance could cost the child Ontario Disability Support Program (ODSP) benefits. A discretionary trust, often called a Henson trust, is a common way to approach that worry.

The details matter a great deal. How a trust is worded affects how it is treated, so it is worth confirming the details with a lawyer. This article explains the main rules in plain language so you can prepare for a conversation with a lawyer.

How ODSP treats a Henson trust

Under ODSP rules, a true absolute discretionary (Henson) trust is not counted as an asset, no matter how much capital it holds. The trustee has full discretion over whether to pay anything to the beneficiary.

For that reason, a payment from the trust is treated as a voluntary payment, because the trustee decides whether to pay and has no obligation to do so. The key word is true. A trust that gives the child a right to demand money or limits the trustee's discretion may be treated differently.

Trusts that are not fully discretionary

If the child has a more definite entitlement, the rules change. An ODSP recipient's beneficial interest in trusts whose capital comes from an inheritance or life insurance proceeds and is available for maintenance is exempt only up to a combined $100,000, together with the cash surrender value of life insurance.

That limit is why parents commonly choose full discretion. It also shows why the wording of the document is so important.

Money going to the child directly, or the child's own money

If a person on ODSP receives an inheritance or life insurance money directly, they 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 on self-settled trusts. 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 parent's plan should therefore direct the gift into the trust, rather than to the child first.

Payments out of the trust and ODSP income

How the trustee spends trust money can affect benefits. Different rules apply depending on the purpose.

• Payments from a trust, life insurance policy, gifts or voluntary 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 regulations on these limits have been the subject of change and differing summaries, so confirm the current figures with a lawyer before the trustee starts making payments.

The trustee's role and the child's age

A trustee must use the care, skill, diligence and judgment of a prudent investor when investing trust property. The trustee must consider listed criteria when planning investments, must diversify to an appropriate extent, and may obtain investment advice. These powers do not authorize or require acting inconsistently with the terms of the trust.

A trustee is entitled to a fair and reasonable allowance for their care, pains and trouble and the time spent, fixed by a judge of the Superior Court of Justice. This does not apply where the instrument creating the trust fixes the allowance. A trustee can also ask the Superior Court of Justice for opinion, advice or direction on managing trust property without starting an action.

If the child is a minor, a person reaches the age of majority at 18. A child generally receives their share at 18, or at the age stated in the will or beneficiary designation. This is another reason to name a trust rather than leave money to the child outright.

What to do next

• Check your existing will, RRSP, TFSA and insurance designations to see who is named, and whether the child is named directly.
• Choose trustees you trust and a successor, and think about how they will work with the child's ODSP caseworker.
• Ask a lawyer how the document should be worded so that it is a true discretionary trust.
• Keep records of every payment the trustee makes and its purpose.
• Review the plan whenever ODSP rules, your family or your assets change.

Frequently asked questions