Henson Trust Canada: Protecting a Disabled Dependant Without Losing Benefits

Provincial disability income programs test a recipient’s assets. An inheritance paid outright can push a person over the limit and stop their benefits until it is spent down. A Henson trust avoids that: because the trustee has absolute discretion over whether to pay anything, the beneficiary has no right to the money, and provincial programs that recognize these trusts don’t count it as the beneficiary’s asset. The name comes from an Ontario court case about a trust left for a daughter receiving provincial benefits. This page is part of our estate planning guide.

Henson trust vs an outright inheritance vs an RDSP

Families often use both: an RDSP to collect the grants and bonds, and a Henson trust for larger amounts. How the RDSP works is covered in the RDSP guide.

How a Henson trust is set up

A Henson trust is usually created in a will, as a testamentary trust funded from the estate, life insurance or registered plans; it can also be set up during the parents’ lifetime. The key elements:

1. Absolute discretion. The trustee must have absolute and unfettered discretion over whether, when and how much to pay. This is what keeps the assets out of the program’s asset test.
2. A trustee and successors. A family member or a trust company; the beneficiary can’t be the sole trustee. Successor trustees cover the long life of the trust.
3. A broad purpose. Payments for the beneficiary’s care, comfort and well-being, supplementing rather than replacing government benefits.
4. Residual beneficiaries. Who receives what’s left when the beneficiary dies.
5. Other provisions. Whether the trust can accept gifts from other relatives, trustee compensation, and the power to contribute to the beneficiary’s RDSP.

Because the wording decides whether a program accepts the trust, families usually have it drafted by an estate lawyer who does disability planning.

How provinces treat Henson trusts

Most provincial disability income programs outside Quebec recognize fully discretionary trusts in some form, but the details (whether payments from the trust count as income, any limits on what can be paid out each year) differ and change. Ontario’s ODSP is covered in ODSP in Ontario. Quebec’s civil law handles trusts differently, so Quebec families plan with a notary. Confirming the current rules with the provincial program before the trust is finalized is the usual step.

How a Henson trust is taxed

Most trusts pay tax at the top rate on income they keep. A testamentary trust for a beneficiary who qualifies for the Disability Tax Credit can elect to be a qualified disability trust and pay graduated rates instead; income paid out to the beneficiary is generally taxed in their hands. How testamentary trusts, graduated rate estates and qualified disability trusts are taxed is covered in testamentary vs inter vivos trusts, and the credit itself in the Disability Tax Credit guide.

Planning steps for families with a disabled dependant

1. Open an RDSP if the beneficiary qualifies for the Disability Tax Credit, to start collecting grants and bonds.
2. Check whether RRSP or RRIF money can roll to the beneficiary’s RDSP at death.
3. Put a Henson trust for the beneficiary’s share in your will.
4. Name the trust, rather than the beneficiary, on life insurance, group benefits and pension designations (see the beneficiary designation guide).
5. Review the plan whenever provincial program rules change.

A power of attorney for the parents themselves matters too, so someone can keep the plan running if a parent loses capacity.

Related pages

• Disability Tax Credit
• How to make a will
• Mortgages on disability income