Financial Checkup: Helping a disabled grandchild

John has $600,000 in RRSP assets; Susan, who took time off to raise their three children, has $450,000 in RRSPs. Each spouse also has about $300,000 in non-registered assets and $28,000 in tax-free savings accounts (TFSAs).Their mortgage-free home is worth about $600,000. John qualifies for full Canada Pension Plan (CPP) benefits; Susan, for 60% of the CPP. Neither spouse has life insurance.

John and Susan currently spend about $45,000 annually after taxes and make the maximum TFSA contribution. They think they could reduce this spending to $40,000 annually, thereby providing $5,000 a year to be put aside for Ethan’s care. They want advice on the best use of the money to be set aside for Ethan.

THE RECOMMENDATIONS: Hurlburt says this situation is a potential minefield that needs to be approached cautiously and with extensive discussion with the family, including John and Susan’s other two children. Before having these discussions, John and Susan need to research some issues.

A key issue is whether John and Susan have sufficient assets to be able to afford institutional care for one of them while maintaining their home and the costs of the other spouse’s lifestyle.

The worst thing that could happen would be for John and Susan to become a financial burden to their children. Hurlburt notes that the couple might not have enough assets to rule this out. Thus, they need to consider long-term care (LTC) insurance. At this point, the couple should not put capital into a trust for Ethan. A better option, suggests Hurlburt, is for John and Susan to leave money for Ethan in a testamentary trust.

Another major issue the couple may not have considered is the views of their other two children. Will they be content with John and Susan providing more support for Ethan than for the other grandchildren?

If not, John’s and Susan’s plan may have to include equal funding for their other grandchildren. Explains Hurlburt: “John and Susan likely don’t want to create family strife, so they need to be sensitive to their family dynamics and the feelings and needs of other family members.”

But before addressing these questions, research is needed to establish what government and other support Ethan is likely to qualify for. Helping with this research is one of the most helpful things that John and Susan can do. Parents of AS children usually are so overwhelmed with coping with their day-to-day challenges that they don’t have the energy – let alone, the time – to do this research themselves.

The first question is whether Ethan qualifies for the federal disability tax credit, which requires a certificate issued by a medical professional. Having this document is the key to accessing the full range of federal support and tax credits that Ethan and his family are entitled to.

For example, only those who qualify for this credit can receive the child tax benefit disability supplement or be a beneficiary for a registered disability savings plan (RDSP).

In general terms, this credit requires that the child have a severe and permanent impairment that significantly restricts his or her ability to perform basic activities, such as the physical tasks needed to live independently. Mental disabilities are included.

The combined disability tax credits from federal and provincial sources for British Columbia residents in 2013 is $1,529, plus an additional $674 for a disabled minor child. In addition, $10,000 in child-care expenses can be deducted for a child who qualifies for the disability tax credit, up to age 16. (The child-care expenses limits for children who are not disabled are lower). Disabled children also qualify for the arts and fitness tax credits at enhanced levels.

Kinnear also points out that there is a long list of possible medical expenses that can be claimed as deductions, possibly including all or part of private-school fees.

Hurlburt has clients who claim school fees as a medical expense in the case of schools that offer programs appropriate for children with learning disabilities or other special needs.

Income tax returns can be resubmitted for prior years if there are deductions or tax credits that the individual qualified for but didn’t submit. That could include the disability tax credit itself if, for example, an assessment of Ethan now indicates that he had been disabled from birth or at age one or two.

Hurlburt notes that the federal and provincial disability child tax credits are transferable to family members who are “supporting persons.” Thus, if Ethan’s parents’ income isn’t sufficient for them to benefit from these credits, they should consult an accountant or financial planner to see if John or Susan could use some of these credits if they pay the related costs.

Indeed, it would be a good idea for Ethan’s parents to consult a financial planner to draw up a financial plan and ensure that they are getting all the credits and benefits they can. Paying for this, as well as annual or periodic updates of the plan, could be one of the most important things John and Susan could do to help Ethan.

RDSPs are not intended for short-term support; rather, they are aimed at accumulating assets over decades to support disabled individuals later in life. Early withdrawals generally carry repayment penalties, including repaying all or part of the grants and bonds provided by the federal government for 10 years prior to any early withdrawal.

If family income in 2013 is less than $87,123, the federal government contributes a grant of $3,500 to the RDSP if at least $1,500 is contributed by the family; if family income is higher, the grant is $1,000 for a $1,000 contribution by the family. The government also contributes bonds to RDSPs, for which there are different income thresholds. There’s a lifetime maximum of $70,000 in grants and $20,000 in bonds.

Funds in an RDSP remain sheltered from taxes until the beneficiary begins to make withdrawals, which must begin by age 60.

Whether John’s and Susan’s family establish an RDSP depends on two things: whether Ethan is unlikely to hold down a full-time job as an adult and whether there is sufficient income – including any help from John and Susan – to allow for the RDSP contributions on top of the family’s other expenses.

There are support groups for families coping with a disabled child, as well as professionals who provide disability-related training and consulting services. Hurlburt says paying for a consultation and/or training for Ethan and/or his parents could be another very valuable thing John and Susan could do.

The couple also could consider attending a workshop themselves to understand more about AS, the likely outcomes for this condition and how to relate to Ethan and support him to help him realize his full potential.

Once the research has been done and the government support is in place, Ethan’s parents need to establish how much they can afford to spend for the additional costs associated with helping Ethan cope. This will determine whether the parents need short-term help from John and Susan. An important factor is whether one of the parents will need to switch to part-time work to care for Ethan. Hurlburt notes that it’s unusual for both parents of a severely disabled child to be able to work full-time unless they have a “very talented nanny.”

Hurlburt adds that it’s not uncommon for the stress of looking after a disabled child to lead to divorce. So, it’s important that John and Susan carefully consider any support that increases the family’s assets, such as helping with a mortgage.

Before finalizing the support that John and Susan are going to give, Hurlburt strongly recommends that the couple look at their own financial situation. They may be better advised to use the $5,000 a year for LTC insurance.

If the couple don’t want to purchase this insurance, they need a financial plan that assumes that at least one of them lives to 95 or 100. After that, they can assess what is reasonable to spend on Ethan annually.

Another option, says Hurlburt, would be for John and Susan to move to Vancouver so that they could provide personal help. Giving Ethan’s mother a three-hour respite period three times a week could be more valuable than financial help. John and Susan also could provide this if Ethan’s parents found the idea of moving to Regina attractive.

Hurlburt strongly recommends that John and Susan don’t set up a trust for Ethan at this point. Even if the couple don’t think they need the assets for their own care, Hurlburt suggests they keep their options open and use their wills to provide for Ethan and other family members.

Both Hurlburt and Kinnear emphasize that any money put aside or left to Ethan in a will should be in a discretionary “Henson” trust. Assets in such trusts are not included in the calculation of a disabled person’s assets when it comes to most government social-assistance programs. Payments from such a trust, up to certain annual limits, are usually exempt from the income test.

This would be critical if Ethan is not able to hold a full-time job as an adult. Kinnear notes that the trust could be wound up at any time that the trustee(s) think Ethan can handle the money himself.

If John or Susan qualifies for life insurance, Hurlburt says, they could consider purchasing it now to fund Ethan’s testamentary Henson trust, which would be named as the beneficiary.

It’s important to remember that government support and tax credits change when a disabled child becomes an adult.

Hurlburt also notes that the qualifications for adult disability are not identical to those for childhood disability.

© 2013 Investment Executive. All rights reserved.