What happens when someone you love requires constant, lifelong support, long after you’re able to provide it? It’s a question no family ever wants to face, but it’s the reality for thousands of Canadian households with a child coping with a severe disability, injury or special need that prevents them from ever fully supporting themselves on their own.
Helping families navigate these decisions is Carol Willes’s specialty. As BMO Private Wealth’s Director of Estate Planning, Willes has seen many situations in which well-meaning plans to support a disabled child unintentionally impact government benefits, increase tax burdens or even threaten critical financial support later in life.
When creating a plan for someone with a disability, you should consider their care both now, and in the future, as their needs may evolve in unexpected ways. Disability programs can be expensive when you consider medications, therapies and assisted living, Willes explains, with costs potentially reaching tens of thousands of dollars a month. In some instances, families may also need to consider managing their beneficiary’s estate, if the disability prevents them from creating a Will on their own.
There are many ways to support family members with disabilities, but choosing the right approach for your loved one depends on several factors. Here’s a look at some of the tools available to help provide lifelong care for a disabled child and some of the pitfalls to avoid.
RDSPs are an overlooked way to save for a child with a disability
Willes is often surprised by how many families she encounters who are unaware of one of the most tax-efficient ways to save for a child who requires lifelong care: the Registered Disability Savings Plan (RDSP).
An RDSP works a little like a TFSA in that contributions are not tax-deductible, but the money invested in the account grows tax-sheltered, and withdrawals from the account are only partially included as income in the beneficiary’s hands for tax purposes. While initial plan contributions may be withdrawn tax-free, any income earned on those contributions, as well as the amount of withdrawn grants and bonds are taxable in the hands of beneficiary. These plans offer an important advantage: the fact that withdrawals are not considered income by most provincial benefit programs means eligibility for provincial disability benefits won’t be impacted, whereas other sources of income could potentially reduce how much that individual might receive from those programs. Families should always check with their provincial benefit program to determine how RDSP payments could impact the benefits paid from the provincial program.
“There’s a lot of education that needs to happen around RDSPs,” she says. “When families find out that they can put money in an RDSP and it belongs to their child and it doesn't affect their provincial benefits, a whole new window opens for them.”
To qualify for the registered account, the beneficiary must first be certified by a medical practitioner as eligible for the federal disability tax credit (DTC) due to a severe and prolonged impairment. The DTC is a non-refundable tax credit that reduces the tax a person with a disability or their supporting family member pays.
While there are no annual contribution limits on an RDSP, there is a lifetime cap of $200,000, which can be made up to the year the beneficiary turns 59. There are no restrictions on who can contribute to the account, though if the disabled person has the mental capacity to open an account, they must set it up themselves and decide how the money will be managed. If the individual isn’t capable of opening an RDSP on their own, it’s up to their parent or legal guardian to set one up, explains Willes. For estate planning purposes, she notes that the funds in the RDSP belong to the beneficiary and are distributed as part of their estate on death.
One key benefit to an RDSP is the government grant that matches contributions by between 100% and 300% up to $3,500 a year, depending on the beneficiary’s adjusted family net income. Over the lifetime of the RDSP, those grants could add up to $70,000 to the account. As of 2023, the government has contributed roughly $4.5 billion in matching grants since the program’s inception in 2008. For low-income Canadians, the government will also pay a $1,000 bond per year, up to a maximum of $20,000, directly into an RDSP, regardless of whether contributions have been made to the account.
You can also fund the RDSP with your estate, by transferring assets tax-deferred from your RRSP or RRIF to a disabled child or grandchild’s RDSP, provided there is still contribution room remaining and other eligibility requirements are met, says Willes.
“I often encourage clients to provide for that in their Wills, if there is an RDSP set up,” says Willes. Even if you’re not sure whether there will be room in the RDSP, she notes, it’s worth listing that as your preference so you’re covered.
Providing a higher standard of care without cutting off benefits
There are additional ways to support a disabled loved one without affecting their eligibility for government benefits. One approach that is popular with families who want to ensure the highest standard of care is to establish a Henson Trust, explains Willes. This type of discretionary trust ensures a separate trustee – not the beneficiary – controls the assets.
Usually, a Henson Trust is used to manage a disabled child’s inheritance. It’s important to set up this structure well in advance to ensure recipients are taken care of in all circumstances, Willes says. “If you’re going to provide above the standard living care arrangements, do that within a trust so that there is no personal ownership in the hands of the beneficiary.”
With a trust, all decision-making is left to the trustee managing the assets. They have absolute discretion, though that individual is legally bound to ensure the trust assets are maintained for the disabled person’s benefit.
“In legal terms, that means only the trustee can make decisions about if or when the child gets any assets, income or capital out of the trust,” says Willes. “It sounds really draconian, but it’s because of the rules that surround these government benefit programs that stipulate, if you have personal resources, you are expected to use those first for your own care and needs.”
It is worth noting that most Canadian provinces recognize Henson Trusts as a complementary planning strategy for individuals with special needs. In Quebec, families should seek specialized advice on how to structure these types of trusts for their family member.
Additional ways to transfer wealth to a disabled child
If maintaining eligibility for public disability benefits isn’t a priority, other types of trusts may offer more flexibility. Here are a few options.
Discretionary trusts
Although a Henson Trust is a discretionary trust, the exercise of the trustee’s discretion can be quite rigid to protect public benefits for the beneficiary. If this protection is less important, the trustee’s discretion can be exercised with more latitude to respond to a beneficiary’s changing life situation, such as living arrangements or future care. Discretionary trusts can prevent beneficiaries from accessing assets directly, helping reduce the risk of exploitation or mismanagement and enabling long-term oversight. Any trust you set up will require its own annual tax return, which can add costs, says Willes.
Lifetime benefit trusts
With this option, you can make tax-deferred transfers from your RRSP or RRIF into the trust, provided the beneficiary suffers from a mental rather than physical infirmity. However, Willes cautions that lifetime benefit trusts can be complicated to work with and could affect the beneficiary’s eligibility for provincial benefits. Here, the trust structure is established in your Will and outlines which assets can go into the trust. Once in place, the trustee has to use the assets to purchase an annuity, which provides regular monthly income to the trust. “It can’t be just any old annuity,” Willes notes. “There’s a list of statutorily approved annuities that must be purchased.” The trustee has discretion when to use the trust’s funds or make payments for the beneficiary.
Because lifetime benefit trusts can only hold specific annuities, this structure doesn’t offer the same potential for growth compared to other trusts and the RDSP, which may sway some families away from this approach.
Naming a guardian and trustee
Establishing a financial plan to provide a lifetime of care is only part of the process. You also need to nominate someone who could serve as the child’s guardian or trustee, to watch out for their well-being, and possibly another person to serve as guardian of the assets.
When selecting a guardian, remember you’ll need them to serve as a quasi-parent when you no longer can. This person will answer critical questions about where the child will live, whether they need assisted living or institutional support and more, says Willes, so it is important to choose someone you can trust who shares similar values.
“I always recommend to parents that they nominate one or two people in their Will and in their powers of attorney who could step up and apply to be guardians,” says Willes. Although the court ultimately decides who will be a guardian, it typically gives a lot of weight to the parent’s opinion on who would serve in the child’s best interest.
Given that this sort of planning typically involves a child, the age of the guardian and trustee becomes more important. “I normally recommend you nominate someone plus an alternate who is potentially younger than you,” Willes explains. “Often people want to nominate their siblings and that’s fine, but you need to have a backup as well, because that [first] person may not be able to provide decision-making or care for the child when they reach 70 or 80.”
Choose carefully. There’s no easy way without court intervention to compel someone acting as a guardian to replace themselves if anyone feels they’re not acting responsibly, says Willes. Even if age isn’t an issue, circumstances can change, which could make it impossible for the person you’ve picked to fulfill their responsibilities. While you can turn to a trust company to be the guardian of assets, that’s not an option for the guardian of an individual for their personal care needs.
When it comes to property and assets, there are more ways to ensure oversight. For starters, the person chosen is accountable to the official provincial guardian and the courts, although Willes notes the rules differ depending on where you live. The guardian overseeing the assets must also file a management plan that establishes that they understand the assets of the disabled person and how they’re going to manage them. Failure to properly follow the management plan can result in removal as guardian or other serious repercussions.
It’s a good idea to make sure the person you intend to manage the child’s finances has the right skills, rather than just being someone you’re close to. “For the role of guardian or trustee, you want somebody who really understands legal liabilities, responsibilities and obligations to your child, understands the financial world of managing funds for other people’s benefit, and who is likely to be subject to some kind of oversight somewhere, whether it’s a professional body or internal or external auditors,” she says.
Since the child will likely outlive many of the people you might pick for this role, it’s worth considering naming a trust company such as BMO Trust instead, which will ensure continuity in the management of assets, says Willes. Those who want a family member or friend who knows the child to be involved can also appoint a co-trustee or family advisor, she adds.
A cautionary tale
If you’re relying on your estate to provide lifelong care for a disabled child, make sure everyone involved in your planning understands your intentions. Willes recalls one family that created a Henson Trust for one of their three children, expecting the trust to hold that child’s share of the estate. But because the mother named all three children as direct beneficiaries of her registered accounts and placed her non-registered accounts and properties into joint ownership, there were no assets left in the estate to put into the trust.
“There was absolutely nothing that could be used to set up a trust,” explains Willes. To complicate matters more, the decision meant the disabled son no longer qualified for his provincial benefits. Once they’d taken the assets out of the estate, there was no way to place them into a Henson trust, she says. “It was all because somebody didn’t ask her, ‘What’s your estate plan?’”
It’s also important to share details about your plan with any well-meaning family members who you think may want to offer support to the child through their own Will. Depending on how the gift is transferred to the disabled child, it could have a significant impact on their ability to qualify for government benefits, explains Willes.
“Anybody who has a child with special needs should do everything they can to educate other family members that they think might be leaving anything for their child,” she says. “Just to make sure that it doesn’t end up being a problem.”
Build a plan that will last a lifetime
“Lifelong coverage” can mean different things in different contexts – a product warranty isn’t expected to outlast its owner, for example. But when you’re planning for a child with a disability, “lifelong” truly means for life – and sometimes beyond.
If a child’s disability prevents them from drafting their own estate plan, then that responsibility can fall on the parents too. When setting up a trust, you can include directions on what should happen with any remaining assets after the disabled child dies, whether that’s giving that money to charity or to other family members, explains Willes.
With all of the moving pieces involved in drafting a plan to provide lifelong care, it can be helpful to work with an expert who can identify potential challenges to avoid and help you find the most tax-efficient way to provide the standard of care you envision for a disabled child.
Putting a plan in place that can outlast your lifetime – and your child’s – can feel overwhelming. But in Willes’ experience, there are few limits to what families will do when their child’s future is at stake. The lengths families go to secure lifelong care echo Nelson Mandela’s message at the opening of the First Annual South African Junior Wheelchair Sports Camp in Johannesburg in 1994, “Disabled children are equally entitled to an exciting and brilliant future.”
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