Trusts Can Help When Tragedy Strikes

Trusts are not just for the wealthy or families with a special needs child who require the provision of a Henson trust. Contrary to general belief, trusts can be useful for a significant group of people.

A testamentary trust (one which is included in a will) is especially valuable for tax reduction when a family has young children. The tax savings for survivors are indeed significant. Let’s look at an example.

John Smith and his wife Jane have one child. When John dies, he leaves his life insurance proceeds of $200,000 in trust, with all other property going directly to his wife. He indicates that the beneficiaries are his child and his wife, and the trustee is his wife. She is free to spend the money in the trust in the interests of the child – fees for summer camp or purchasing a computer, anything that furthers the child’s advancement in life – and if desired she also can receive money from the trust.

Now let’s say that the $200,000 insurance proceeds are invested and earn three per cent interest for a sum of $6,000. If there was no trust, and surviving spouse, Jane Smith, was working and earning $38,000 per year, as well as receiving the insurance money herself, her marginal rate of tax in Ontario would go from 22 per cent to 33 per cent.

She would then need to pay another $2,000 in taxes. With the trust however, the earnings are declared in the hands of the child, therefore no tax is incurred and her taxation stays at the lower rate.

Even if the sum received from the trust is greater than the personal exemption the additional amount would, in all likelihood, only be taxed at 22 per cent.

Kenneth Pope is a lawyer in Ottawa who specializes in the area of Henson trusts and providing financial security for families with a disabled or special needs member. He says, “A lawyer’s best practice for estate planning purposes is to create an initial trust arrangement with a nominal bequest of $100, which can later be funded with the parents’ insurance or grandparents’ gifts, when appropriate.”

It could also be that a grandparent wishes to establish a trust for their grandchild, with one or both parents as trustees.

They have the authority to spend the money in any way they deem appropriate for the benefit of the child, and the income would again be taxed in the hands of the grandchild, at the lower rate. Should the parents decide to forgo their inheritance to fund the grandchild’s trust, this can be referred to as a �skip generation trust.’ It is an extremely flexible and valuable planning tool in many cases.

A Henson Trust Protects Your Family and Your Estate

If a family member with special needs is receiving Ontario disability support benefits, and if they are left an inheritance, that inheritance is considered an asset and will disqualify them from benefits unless special arrangements are made in the parents’ Will.

The only real solution to this inequity is a HENSON TRUST, created by the parents’ Will. Only available since 1989, when the case after, which it is named was upheld by the Ontario Court of Appeal, it places estate assets in the care and control of a Trustee to be administered for the benefit of a beneficiary. Inheritances placed in a properly prepared Absolute Discretionary Trust are not the asset of the child and will not affect provincial benefits.

Many families have members who require assistance in handling their daily affairs, regardless of their other abilities. Special Beneficiaries often benefit from guidance in handling large sums of money or significant assets, temporarily or on an on-going basis. Some beneficiaries may be unable or unwilling to seek guidance, and may at some point be left without care unless special provisions are put into place.

To solve these problems a Henson Trust must be created, during your lifetime (inter vivos) or according to the terms of your Will (testamentary). These Trusts are invaluable in planning for your child’s care when you are no longer there.

These special arrangements are necessary to properly ensure that loved ones will be given the extra care they deserve, and that inheritances will not be wasted. Specialized legal counsel is necessary to ensure that the drafting of Wills follows the court-tested arrangements required, and to continually consider any changes in provincial regulations and new case law.

When a client considers the modest fees involved in establishing a trust, offset by saving thousands of dollars as demonstrated in the Smith family illustration, the belief that trusts are only for the wealthy becomes nothing more than a myth.

Written by Peter Merrick

Peter Merrick, FMA, CFP, FCSI, Instructor at George Brown and Seneca Colleges, President of Merrick Wealth Management, a boutique financial planning, employee and executive benefit consulting firm.

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