PROVIDING FOR SPECIAL NEEDS CHILDREN
Many Canadian families include a disabled child or sibling. Sometimes the disability is physical, other times it is a mental limitation. Whatever the nature of the disability, the parents are the child’s primary safety net. During their lifetimes, Mom and Dad provide the physical, emotional and financial support so critical to the child’s well being. Frequently the child lives with the parents, who are in the best position to address the special needs. Usually the parents also assist the child monetarily. The dilemma for parents is: When we are no longer around, how will our disabled child be cared for and protected?
GOVERNMENTS HELP AND HINDER
While parents provide the principal protection, governments do play an important role. Each province has its own support legislation and program. In Ontario, the help is delivered through the Ontario Disability Support Program (ODSP).
ODSP delivers a variety of valuable services to the disabled and their families. The primary benefit is through income support to assist in housing.
ODSP has its drawbacks though. A disabled person is strictly limited as to the amount of liquid assets he or she can have. The maximum is $5000, and this includes not only bank accounts and investments, but also furnishings and even moneys held in simple forms of trust. If this limit is exceeded, the ODSP benefits cease.
Another significant restriction is that the disabled person cannot receive more than $5000 in income from other sources for living expenses, without in loss or reduction of ODSP benefits. This other income could be from part time employment, or from investment or trust income, or financial gifts from family members.
A disabled person trying to get by on only ODSP income will not have a very comfortable standard of living by any measure. The predicament is that if parents or family provide financial assistance beyond the $5000 limit to allow the disabled family member to live in a nicer home, or eat better food, or dress in warmer clothing, then they risk the reduction or loss of ODSP benefits for the child.
While the parents are alive, they can usually find ways to contribute without running foul of the ODSP, by supplying groceries from time to time, or taking the child out to dinner, or buying a new winter coat. The anxiety for parents is, what happens when we are no longer alive? Who will then have the money or the inclination to help the disabled child?
Don’t expect the government to do all that is needed. The governments role in providing for the care of disabled adults is much reduced. As the Toronto Star noted in a recent investigative report, “No matter the age of parent or child, there is a lack of funding, a lack of places to live, a lack of support, a lack of options for Ontario’s most vulnerable citizens.”
While government may increase its commitment to the disabled community in the future, there is no question that the primary responsibility for care giving and planning remains with the parents today. Delay only increases the difficulties for a disabled child’s prospects. Partly this is because of the length of time required to make safe alternative arrangements, particularly for accommodation. The same Star article reported that a there is a list of over 17,000 people waiting for support funding, group home placements or daytime activity programs. Those on the list may well wait for decades. In the final analysis, parents must take the lead in providing for their disabled child, even after the parent’s death.
WILLS MAY NOT WORK
Parents usually provide for their children by leaving an inheritance in their Wills. That traditional approach can be counter-productive for a disabled child. An outright inheritance of more than $5000 paid to the child will at least interrupt the ODSP, including the crucial prescription drug benefits. Even money left in a simple form of trust for the disabled child can produce the same negative result. Leaving an inheritance of less than $5000 directly or in a simple trust will avoid the ODSP cut off, but then the amount is so small it can’t provide significant or long lasting assistance.
Other parents, aware of this problem, choose to leave money to one of the other children, and expect he or she will use that money to assist the disabled sibling. This may not be realistic or safe. There is no way the parent can ever be sure that the money will be used for the intended purpose. Even if the sibling honestly tries to use the money for the disabled child, the ODSP restrictions still apply. As well, if the able child runs into financial problems or goes bankrupt or suffers a marriage breakdown, the money meant for the disabled child may end up with creditors or divorcing in-laws.
Some parents are so discouraged by the planning difficulties they simply leave the special needs child out of the Will, hoping that government bureaucrats, family members and charitable organizations will somehow work things out. This approach just compounds the disabled child’s challenges and uncertainties. There is a better way.
ABSOLUTE DISCRETIONARY TRUSTS
The preferred solution for the disabled dilemma is a very special form of trust technique, called an Absolute Discretionary Trust. The proper use of this type of trust permits parents to provide financially for the support of the disabled child, without adversely affecting the ODSP benefits. This trust is also known as a Henson trust, named for Audrey Henson, a disabled woman from Guelph. Her father’s Will was the first using this technique to be upheld in court.
With an Absolute Discretionary Trust in the parents’ Wills, an inheritance is left for the disabled child that can be relied upon to assist the child for the rest of his or her lifetime, without affecting the ODSP benefits. This estate planning technique has many advantages:
- The child will not be disentitled to ODSP benefits, even if the amount left in the Trust is far more than the modest $5000 limit before disqualification. Tens, even hundreds of thousands can be set aside from the estate for the disabled child’s exclusive benefit, without triggering ODSP problems.
- The disabled child’s income from the Trust for non-disability related expenses such as food, clothing, housing and entertainment can be substantially supplemented, to a maximum of $6000 per year, without suspending or affecting the ODSP benefits.
- The child may also receive sums in addition to the $6000 for disability related expenditures, such as assistive devices, education and medical matters. For example, the Trust could buy a $10,000 electric wheelchair for a physically disabled child without risk.
- The Trust money remains available for the child as a safety net if the ODSP benefits ceases in the future, because the program ends, or redefines his or her eligibility.
- When the child turns 65, the ODSP ceases and federal support can become available. Then the limitations on income and capital from the Trust no longer apply, and the trust money is available for the benefit of the ageing child without those arbitrary restrictions.
- If the child's needs during his or her lifetime do not require the expenditure of all of the trust assets, then after the child’s death the remaining money can be directed to surviving family members or charitable organizations.
HELP THE CHILD AND SAVE TAXES
The many benefits of this type of trust are not limited to the parents’ Wills, funded by the estate after their death. An Absolute Discretionary Trust can deliver important advantages while the parents are alive.
An Absolute Discretionary Trust of this type is particularly valuable if the parents have a significant taxable income and already contribute financially to the child. If so, the help provided by the parent is with after tax dollars. This can be very inefficient. For example, a top marginal rate father may earn $4000 from employment, pension or investments and want to spend this on his disabled daughter. However, about half of his earnings are diverted away from the family to the government in income tax. This leaves barely half the amount he intended for her. This Dad will actually need to earn almost $8000 to have $4000 after tax to help his disabled girl.
If the parent uses an Absolute Discretionary Trust as the vehicle to provide financial assistance to the disabled child, under the right circumstances no tax is paid and all $4000 can be used for the child. As a bonus, the parents’ income tax is also reduced.
In some families, parents establish an Absolute Discretionary Trust now, which results in more money available for the child and less money scooped by the government for tax. After the parents have passed away and no longer need their assets for their own support, the Wills direct more money into the Trust to help the child for the rest of his or her life. Depending upon the size of the estate, it may even be possible to provide for a nest egg sufficient to release the child from ODSP rules. Then the disabled child will enjoy a higher quality of life, without the arbitrary limitations and restrictions.
Don’t be mislead. An Absolute Discretionary Trust is not a magic wand that makes all of the problems of a disabled child disappear. It is a sophisticated legal tool ensuring that financial means are available to provide for the housing, clothing, food and other needs for the child’s lifetime, while retaining all available government support.
WHAT SHOULD I DO NOW?
Consult an estate planning lawyer: If you have a disabled child in your family, the essential first step is to find out more about Absolute Discretionary Trusts. They are complicated legal techniques, and require expert assistance from an estate planning lawyer to set up. Once they are in place, however, there may be no substantial continuing costs to operate. The lawyer will assist you to analyze your resources and the child’s financial and other needs, then recommend the appropriate approaches to maximize the benefits.
Take advantage of financial planning: You may feel that your resources are not sufficient to provide for your disabled child’s future. A professional financial planner may change your mind. The sale proceeds of your house after your death may be the key. A joint and last survivor life insurance policy may be affordable and provide the needed funds. A new insurance product called an estate bond could be the answer. There are also special tax exemptions in some circumstances permitting the unused portion of your RRSP or RRIF to be directed to the disabled child, without loss of capital due to income tax upon your death.
Consider the big picture Financial security has to be the fundamental focus, but the big picture includes much more. Many other issues remain to be addressed by parents for the continued care of their child. These include planning for safe and appropriate residential accommodation, the choice of capable and honest trustees to handle the administration of the trust, and arranging for caring individuals to ensure that the disabled child’s personal needs are met when the parents are no longer available to do so.
Start soon: It’s neither safe for the child nor fair to the parent to delay the start of the planning process. The parents’ increasing age and decreasing health may make an already complicated duty much more demanding. An unexpected incapacity or untimely death will rule out the parents’ involvement and squander the disabled child’s last, best chance for future security. Another good reason to start the process soon is that then time is available to ease the transition from direct parent involvement. This will reduce the stress of change for the disabled child and advance the learning curve for whoever will eventually fulfil the parents’ role.