Epilepsy Ontario :: Maximizing Disabled Beneficiary's Entitlement

Maximizing Disabled Beneficiary's Entitlement
Keep the beneficiary's income under $4,000 per year.

Michael Fitz-James

Many persons with disability in Ontario receive income support payments under the Ontario Disability Support Program Act 1997 (ODSPA). Persons planning to leave property to disabled beneficiaries in their wills should carefully plan the gift so as not to compromise those benefits.

Jennifer Pfuetzner, an estates specialist at Toronto's BMO Nesbitt Burns told Law Times that prior to 1997, disabled persons received benefits along with other welfare recipients under the Family Benefits Act. But now, "the ODSPA has created a complete regime that deals with disabled people, providing income support for them."

The new scheme applies to persons with a "substantial disability" that is expected to last for a least a year. Those seeking benefits must be within certain financial parameters: "If you've got too much money, you're not going to qualify," Pfuetzner says.

When calculating those financial parameters, the Ministry of Community and Social Services (MCSS or Comsoc) excludes certain assets from consideration, including:

a basic $5,000 in assets
($7,500 if the beneficiary has a spouse);
the value of a principal residence;
an automobile of any value
plus a second vehicle up to $15,000;
a locked-in RRSPs
(but not non-locked-in plans).

Of most interest to lawyers however, says Pfuetzner, "are two basic types of trust structures which can be used to make sure the disabled person will have assets available to them, but will keep those assets exempt from inclusion in the calculation for ODSPA benefits."

The first structure, she says, "is a basic trust where the capital amount of the trust must be less than $100,000. The trust funds can be derived either from an inheritance which the beneficiary received or from life insurance proceeds."

Pfuetzner says while such as trust is usually created by a testator's will, the beneficiary can take the inheritance or policy proceeds and transfer it into a trust if the testator neglects to create such a trust.

Such trusts will not be taken into consideration for entitlement to ODSPA benefits, but Pfuetzner warns that any income flowing from that trust will be factored in. Entitlement rules provide that any income greater than $4,000 per year "from just about any source" could lead to disqualifying the beneficiary.

That $4,000 income can be reduced to the extent it's spent on "disability-related supplies," she says — expenses such as drug therapy, wheelchairs, prosthetic limbs. But Pfuetzner points out that such expenses are tightly monitored and are difficult to find.

Disabled persons, she points out, usually qualify for many different government programs which pay for disability-related expenses, thereby reducing the opportunity to reduce trust income to below the $4,000 permitted under the ODSPA.

"What I have found is that these $100,000 trusts may not be all that practical in that they can easily put the disabled beneficiary offside for benefits," she says. "So it may be more practical to use a Henson trust."

This structure refers to the trust in Ontario (Ministry of Community and Social Services) v. Henson, a 1987 Divisional Court case where a testator created a discretionary trust for his disabled daughter, Audrey, until her death, with the funds then going to a charity.

The Ministry argued that the full value of the trust should be taken into account court to calculate Audrey's benefits, but the court disagreed because the "trustees had absolute discretion to pay as much or as little out of the income and capital of the trust as they thought fit," says Pfuetzner. "Audrey had no enforceable right to any amount out of the trust."

The Henson trust can be for any amount, but must be discretionary and that's why the probity and goodwill of the trustee is of crucial importance. Plus, says Pfuetzner, the trustee will need to carefully monitor the beneficiary's financial and personal affairs to ensure that s/he isn't disentitled for ODSPA benefits.

"The typical Henson trust has a gift which, on the disabled beneficiary's death, goes to other beneficiaries. In Henson it was a charity, but what typically we see in practice is a gift to other family members, [such as] brothers and sisters."

Such residuary beneficiaries, says Pfuetzner, "have an interest in preserving that fund because they will ultimately benefit from it — so is it a good idea to have them appointed trustee of this trust? Maybe not."

"It probably is in the interest of the lawyer to recommend somebody who is more of a neutral third party to act as trustee — and maybe that means a professional [such as] a trust company."

As for the lawyer being trustee, Pfuetzner says some lawyers make it a policy never to act as trustees for clients. Overseeing a Henson trust, she says, "would be quite a lot of work. It's time-consuming and an onerous role to take on."

A lot of practitioners also think the Henson trust "is going to be foolproof," but Pfuetzner warns there's "anecdotal evidence" that the front-line Comsoc people dealing with applications for income support have become very strict in how they apply these rules.

"They are saying that if the terms of the trust do not virtually replicate the trust in the Henson case itself, they are disqualifying the disabled person from income support. They're demanding identical wording."

"So while the Henson trust wasn't the best-drafted trust in the world, I think lawyers are well advised to try to draft their own Henson trusts as closely as they can to the precedent and not try to improve on it."

Pfuetzner also says that while the Ministry is demanding a strict wording, it's not demanding a residual gift to a charity, as the original Henson trust did. She thinks that gifts over to family members would not disqualify the beneficiary from ODSPA benefits.

As for tax considerations, for the trust structures, Pfuetzner points to the preferred beneficiary election under Section 104(14) of the Income Tax Act.

That mechanism, says Pfuetzner, "allows the income accumulating in a Henson or other trust to be taxed in the hands of the disabled beneficiary — by making of an election under the Income Tax Act."

The election applies even when the beneficiary doesn't receive the income or may not have any entitlement to do so. Using the election, it may even be possible to notionally split the trust's income between the beneficiary and the trust, and thereby reduce tax.

Pfuetzner also points out that a principal residence is not counted as an asset for calculating entitlement for income support, so it may be preferable to leave the residence directly to the beneficiary and not put the house into the trust.

But even if the principal residence is transferred to the trust, it can still claim the principal residence exemption from capital gains if the beneficiary is occupying the house.

As for Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Plans (RRIFs) and Registered Pension Plans (RPPs), lawyers should carefully plan these transfers to a disabled beneficiary.

While the transfer of an RRSP or RRIF to a dependent child or grandchild has special rules [RRSP or RRIF proceeds are taxed as income in the child's hands.], when the dependent child or grandchild is also disabled, RRSP and RRIF proceeds can roll over to a disabled beneficiary's own RRSP on a tax-deferred basis, says Pfuetzner.

RPPs can pass as a lump sum on a tax-deferred basis to a person under 18 (whether disabled or not). However, the recipient must buy an annuity and pay the tax over the years until they reach 18 years of age.

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