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Using Henson Trusts to Plan for a Family Member with a Disability
Using a trust to provide for a special needs family member provides a way of maintaining control of assets in the hands of responsible persons, for the benefit of a family member who is living with a disability. It may preserve his or her access to government benefits, which might be affected by receiving an inheritance.
Such a trust has become known as a “Henson trust”. A Henson trust is designed to prevent an inheritance from having to be spent before the Province will provide financial assistance for the long-term care or other support of a disabled beneficiary. The trustee has complete discretion as to whether to distribute trust property to the beneficiary. The trustee has full control over when and how much income, if any, to distribute to or for the benefit of the special needs beneficiary. The basis for the protection is that the trust property has not “vested” in the beneficiary and may ultimately be distributed to persons other than the disabled beneficiary. This feature prevents the assets of the trust from becoming the assets of, or vested in, the disabled beneficiary.
This form of trust is named after a 1988 decision of the Ontario Court of Appeal, Ontario v. Henson. In that decision a father created a testamentary trust (i.e., a trust in his last will and testament) for the benefit of his mentally challenged daughter. His will specifically stipulated that the daughter could not compel the trustee to pay her any income from the trust. Furthermore, the trustees had full discretion as to the distribution of trust capital. The Court confirmed that because the trustees had absolute discretion over the trust property, the daughter did not have a beneficial interest in the trust assets. As such, the daughter’s interest in the trust could not be characterized as an asset with value, which would otherwise eliminate or reduce her provincial disability benefits.
There are three essential elements of a Henson trust:
- the trustee must have absolute discretion;
- the assets of the trust do not vest in the beneficiary; and
- there is a “gift-over”, or a direction to the trustee as to what is to be done with whatever trust property is left after the disabled beneficiary dies.
A Henson trust, however, is not to be used lightly. Because it relies on the absolute discretion of the trustee in order to meet the requirements of the trust, family members including this trust in their wills must have complete trust in their chosen trustee. That trustee holds a great deal of responsibility, and it is vital to choose a trustee that is unquestionably trustworthy, who will prioritize the best interests of the disabled beneficiary and will not take advantage of their position.
Currently, Henson trusts are used effectively to protect a beneficiary’s entitlement to various government supports in Nova Scotia, though they have not been tested in Court. For more information on Henson trusts and other planning strategies for disabled beneficiaries, contact an estates and trusts practitioner.