Table of Contents
- Meeting The Needs of Disabled Beneficiaries
- Essential Considerations for Estate Planning Evaluation
- Government Benefits and Qualifications
- Key Takeaways for Estate Planning with Disabled Beneficiaries
- Registered Disability Savings Plan (RDSP)
- Preferred Beneficiary Elections (PBE)
- Lifetime Benefit Trust (LBT)
- Additional Considerations
- Conclusion
How can you ensure the financial security and well-being of a disabled beneficiary through estate planning?
Estate planning is essential for distributing your assets according to your wishes and providing for your loved ones. When a beneficiary is disabled, individuals should consider special measures to secure their financial future without impacting government benefits.
Key factors include the nature of assets, protection of benefits, the beneficiary’s independence, and trustee selection. Various vehicles are available to meet these needs.
For parents of a disabled child, ensuring care after their passing is crucial. The will must address the beneficiary’s physical needs, living arrangements, support services, social interactions, and health plans.
Proper estate planning prevents mismanagement of assets, access barriers, or loss of government benefits for disabled beneficiaries. Though each situation is unique, several standard tools are available to provide adequate care for beneficiaries with disabilities.
Meeting The Needs of Disabled Beneficiaries
Individuals with disabilities may have unique financial needs and rely on government assistance programs, which have strict eligibility standards. Effective estate planning should address these specific needs while ensuring government benefits are not compromised. This necessitates a thorough understanding of the financial and legal aspects of disability planning as government assistance may provide essential support for healthcare, housing and daily living expenses.
Essential Considerations for Estate Planning Evaluation
While evaluating the type of estate planning needed, it’s essential to start by examining the following:
- Beneficiary Autonomy and Financial Status
This covers autonomy degree, age, and legal competence and helps determine whether the beneficiary will depend on income-tested government programs or is expected to be financially self-sufficient for the foreseeable future.
- Nature of Impairment
It is essential to check whether the beneficiary’s degree of autonomy will change over time or if their future financial requirements are subject to change.
Government Benefits and Qualifications
People with disabilities in Canada may be eligible for several government benefits, such as the Canada Pension Plan Disability (CPPD) benefits. In addition to Federal programs, Provincial programs, such as Alberta’s Assured Income for the Severely Handicapped (AISH), also exist to assist those with severe disabilities.
These programs offer vital financial assistance but impose restrictions on assets and income; therefore, individuals must create estate plans to maintain the beneficiary’s eligibility for these programs.
Key Takeaways for Estate Planning with Disabled Beneficiaries
To guarantee thorough and efficient preparation, beneficiaries with disabilities must have access to the necessary resources for estate planning. Key factors to consider include:
- Quality Disability Trust (QDT)
A Qualified Disability Trust (QDT) provides advantageous income tax treatment. A trust is usually taxed at the highest marginal rate; however, income within a QDT is taxed at a graduated rate, similar to personal income tax rates.
The above structure gives trustees flexibility in managing income distribution and allows for income splitting between the trust and beneficiary.
For a QDT to be considered, the trustees and the beneficiary entitled to the Disability Tax Credit (DTC) must jointly choose this tax treatment on the trust’s tax return.
Only one trust per beneficiary is eligible for QDT status. However, adopting graduated rates may offset the tax benefits of a “recovery tax” if the same trust distributes funds to non-eligible beneficiaries.
- Henson Trust
A Henson trust is an essential estate planning tool for disabled beneficiaries who are dependent on government payments based on income and assets.
Keeping trust assets outside of the beneficiary’s own maintains the beneficiary’s eligibility for programs such as AISH and gives trustees complete authority over payouts.
However, unless specific requirements are satisfied, such as being eligible for a QDT, income not disbursed annually is subject to the highest tax rate.
Strategic management is crucial for minimizing tax consequences and guaranteeing that the trust adequately supports the beneficiary’s long-term financial security.
Registered Disability Savings Plan (RDSP)
For those with disabilities, the Registered Disability Savings Plan (RDSP) is a tax-deferred savings plan offering government subsidies, bonds, and tax-free growth. An RDSP gives your beneficiary more financial stability when included in your estate plan.
The person has to fulfill the following requirements to open an RDSP account:
- Eligibility for Disability Tax Credit
The individual must meet the requirements for the DTC, which include having a severe and prolonged impairment in mental or physical functions that severely restrict their day-to-day activities.
- Valid Social Insurance Number
The Canadian government must supply them with a valid social insurance number.
- Canadian Residence
The candidate must meet Canada’s residence standards to be considered a national resident.
- Age Requirement
The individual must be contractually competent and between the ages of 18 and 59 to open an RDSP account and make contributions.
Fulfilling these requirements guarantees you are eligible to open an RDSP, an essential first step toward obtaining long-term financial support for people with disabilities through government payments and tax-deferred savings.
Preferred Beneficiary Elections (PBE)
Trusts that do not meet the requirements to be designated as a QDT but have a disabled beneficiary can still benefit from lower tax rates on income retained in the trust. A “preferred beneficiary election” (PBE) allows the beneficiary and trustee to jointly decide whether or not to deduct income from the trust and have the beneficiary pay income tax at the marginal rate, even though the the funds remain in the trust. The PBE avoids the high marginal tax rate that would be applied to the trust’s income and allows the trust to generate additional capital, which may be distributed tax-free to beneficiaries.
To qualify for a PBE, the beneficiary must:
- Be a resident of Canada at the end of the year,
- Either qualify for the DTC or be at least 18 years old and financially dependent due to mental or physical infirmity.
- Stay within the basic personal exemption amount for income tax.
- The preferred beneficiary must also be a relative of the trust settlor (spouse, common-law partner, child, grandchild, etc.) for the trust to have favourable tax treatment and meet the beneficiary's needs.
Lifetime Benefit Trust (LBT)
The intended use of a testamentary trust called a Lifetime Benefit Trust (LBT) is for a child, spouse, or grandchild who is financially dependent due to mental infirmity.
It permits the tax-free rollover of assets held in RRSPs or RRIFs, which would otherwise be subject to total taxation upon the testator’s passing.
Moreover, the trust must use these assets to buy an annuity that will only help the disabled person for the duration of their life.
As with the Henson Trust, the LBT safeguards government disability benefits. It may also meet the requirements to become a QDT, which combines benefit preservation with tax benefits.
Furthermore, if a trust is not qualified as a QDT, it may utilize a PBE to lower taxes.
Additional Considerations
Outright gifts may be an option if a beneficiary’s condition does not interfere with their capacity to manage their finances, and they will not depend on government assistance.
These gifts can be organized using wills, beneficiary designations, and joint ownership. However, consulting with an estate and trust specialist is essential for customized guidance.
In addition, estate planning must consider designating attorneys for both property and personal care to ensure continued assistance if caregivers are unavailable or to secure a guardianship order if the beneficiary is incapable of making such designations themselves.
Conclusion
Ensuring the financial security and well-being of disabled beneficiaries through estate planning requires specific tools and careful consideration.
By understanding their unique needs, utilizing important mechanisms like RDSPs and Henson Trusts, and incorporating thoughtful charitable giving, you can design a comprehensive strategy that safeguards their future. At Faber LLP, we specialize in guiding clients through the complexities of estate planning for disabled beneficiaries.
Our knowledgeable staff offers personalized advice and support, ensuring your estate plan meets your loved ones’ requirements.
Plan for a secure future by contacting us today.