A Henson Trust is a discretionary trust used to protect assets for disabled beneficiaries. The trustee has absolute discretion regarding the use of trust funds and the beneficiary has no legal entitlement to the trust funds. A Henson Trust can be set up by a deceased person (testamentary trust) or a living person (inter vivos trust).
A Henson Trust is a matter of provincial regulation and Henson Trusts are not available in every Canadian province.
In Ontario, a Henson Trust is typically used in situations where the disabled person is entitled to receive support payments and the settlor wants to ensure that that person continues to receive support payments. Under the Ontario Disability Support Programs Act (ODSP) a recipient is not entitled to receive support payments if they have income in excess of a prescribed amount. Because the beneficiary of a Henson Trust has no vested interests in the trust assets nor any right to demand that the trustee pay them the beneficiary is not required to treat the assets as their own and, therefore, a Henson Trust provides a method for providing additional income without interfering with ODSP benefits.
Tax Treatment
Trusts are separate taxpayers that must file their own tax returns. Usually, income retained in a trust is taxed in the trust and income paid out of a trust to a beneficiary is taxed in the hands of the beneficiary. A Henson Trust, however, benefits from an exception to rule that income in a trust is taxed in the trust. The trust and the beneficiary may jointly file the preferred beneficiary election. If the settlor settles are significant amount of money in the trust, the election allows the income earned in the trust to be taxed at the disabled beneficiary’s marginal tax rate.
Advantages of a Henson Trust
The possible advantages of a Henson Trust are:
- Funds from the trust can improve the quality of life of the beneficiary.
- The trust ensures that the beneficiary is provided for financially, even in the event that the settlor becomes incapacitated.
- The trust may result in overall savings of income tax as any income earned in the trust could be taxed at the marginal tax rate of the disabled person rather than at the highest marginal rate (such as in the case of inter vivos trusts).
Disadvantages of a Henson Trust
The possible disadvantages of a Henson Trust are:
- They rely on the absolute discretion of the trustee. The trustee holds an inordinate amount of responsibility.
- In Ontario, the payments to the beneficiary still cannot exceed the income limits for ODSP. Consequently, the beneficiary will still be living on low income. Poorly constructed trusts may interference with the beneficiary’s government benefits.
- Provincial governments may change regulations to disallow Henson Trusts and may apply those changes to existing and/or future trusts.
If you are interested in a Henson Trust or other planning strategies to benefit a disabled relative, please contact one of our lawyers.