Since the landmark case that led to their creation in the 1980s, Henson trusts have emerged as an effective way to preserve government entitlements for individuals with disabilities.
Their effectiveness, however, relies heavily on the terms of the trust being drafted with expertise in a very specific manner.
Background on Benefits
Individuals with physical, mental and medical impairments may receive government disability benefits if they meet certain eligibility criteria. Generally, individuals are not permitted to receive income or own assets above certain amounts. If these amounts are exceeded, the disabled individual will stop receiving benefits until the assets fall back under the threshold.
Disability benefits may consist of income assistance. But the more valuable component for many recipients is the network of social services and support offered through the government programs. The ability to obtain assistive devices, medical supplies, or special nutrition and diet resources to treat certain health conditions may play a significant role in improving an individual’s quality of life. Things like hearing aids, wheelchairs, and vision, speech or respiratory devices are examples of the many forms of support that may be accessible through disability programs.
But direct payments of an inheritance which result in a disabled individual exceeding a program’s threshold amounts may lead to the loss of benefits and support.
The Case of Audrey Henson
The term Henson trust comes from a groundbreaking Ontario case that took place in the late 1980s.1 Leonard Henson set up an $82,000 trust in his will for his disabled daughter Audrey. After Leonard passed away, the government ministry terminated her disability benefits taking the position that her inheritance put her over the asset limits.
This decision was appealed and successfully reversed. Among other reasons, the court ruled that since the trust was fully discretionary in nature and Audrey had no vested interest in the trust, it was not to be considered when assessing Audrey’s eligibility for government benefits.2
Structuring a Henson Trust
It is critical that Henson trusts are structured such that the beneficiary has no ability to claim against or demand funds from the trust. Rather, the trustee has absolute discretion to decide how to manage the trust funds as she sees fit. The trustee will determine whether and how much, if any, income or capital of the trust is paid to the beneficiary. Since the beneficiary has no right to demand payment from the trust, she is not considered to own the trust assets.
Absent any ownership interest, Henson trust assets are not included in the calculation of the threshold amount to determine benefit eligibility. This is a key characteristic of Henson trusts. The trust terms must be drafted in a very particular manner to incorporate both this feature as well as other outcomes.3
A Henson trust can be established as an inter vivos trust or as a testamentary trust through someone’s will. But a person cannot establish a Henson trust for himself.
There are no limits on the value of the assets that can be used to fund a Henson trust. A trustee, however, should be familiar with the relevant disability benefits program to ensure that any payments from a Henson trust do not inadvertently contravene the eligibility criteria.
Tax Considerations
Henson trusts are considered to be a separate taxpayer and as such they are generally required to file income tax returns on an annual basis. Like many other trusts, Henson trusts are taxed at the highest marginal tax rate.
Depending on a variety of considerations, elections may be available such that any income and capital gains earned within a Henson trust could be subject to lower marginal tax rates. The availability and feasibility of such elections, however, may have a variety of other consequences. As such, they need to be carefully considered with the guidance of your legal and tax advisors.4
Potential Benefits
The primary purpose behind the settlement of any Henson trust is to preserve a person’s ability to access social benefits while at the same time providing additional financial support in a manner that is consistent with the eligibility rules for a disability benefits program.
Henson trusts act as a layer of financial security beyond any income payouts provided through disability benefits. Trust funds can be used to pay for expenses to support daily living activities and improve a disabled individual’s quality of life. Common examples of expenses that do not impact eligibility for government support include home renovations to accommodate a disability, contributions to a Registered Disability Savings Plan (RDSP), attendant care support, or a car purchase.
When established as an inter vivos trust, Henson trusts will continue even on the death or incapacity of a settlor such as a parent. When the parent passes away, the trust assets would not be subject to probate, bypassing any probate fees that may be charged.
Possible Drawbacks
As with all trusts, there are recurring costs required to administer a Henson trust. Three common categories of expenses include accounting fees, investment management fees and, if a corporate trustee is involved, trustee fees.
Due to how the terms of a Henson trust need to be drafted, a disabled beneficiary will have no control over the trust funds, no right to compel payment, and no ability to unilaterally collapse the trust. Careful drafting is required. If the beneficiary is capable of asserting more control, this solution may not be suitable.
Additionally, any trustee of a Henson trust must learn and keep up to date with any evolving laws and rules for the relevant disability support program and about Henson trusts in general.
Alternative solutions may also be more appropriate where the inheritance will be much greater than the disability benefits that would be provided. Other types of trusts, including non-discretionary trusts or ones that provide a disabled beneficiary with decision-making authority, may be more suitable in certain circumstances.
Avoiding Unintended Consequences
Since the original Henson decision, its use has expanded beyond disability benefits. In 2019, the Supreme Court of Canada confirmed that this form of a fully discretionary trust may be effective in protecting a beneficiary’s entitlement to various government supports which are means tested.
In addition, Henson trusts may double as an effective form of protection for disabled individuals who are vulnerable to undue influence or are not financially knowledgeable.
However, it is crucial to retain a qualified lawyer who is familiar with this area of law to avoid a poorly drafted Henson trust that leads to significant unintended and undesirable consequences.
When drafted with precision, a Henson trust can serve as an effective component of estate plans to support individuals with special needs.
1. There is acceptance of Henson trusts in a number of provinces beyond Ontario.
2. The court decision is Ontario (Ministry of Community and Social Services, Income Maintenance Branch) v. Henson (1987), 28 E.T.R. 121 (Ont Div Ct), affirmed at (1989), 36 E.T.R. 192 (OCA).
3. The viability of Henson trusts is subject to applicable government regulations for a disability benefit program. Please seek qualified legal advice on the relevant provincial requirements to determine whether this strategy is appropriate for your situation.
4. A detailed discussion on the tax outcomes and options possible for a Henson trust are outside the scope of this article.