The key difference between a regular trust and an absolute discretionary trust — or Henson trust, as it is often called — is ownership, says Graeme Treeby, founder of the Special Needs Planning Group in Stouffville, Ont.

A typical trust is owned by the beneficiary and administered by a trustee. But a Henson trust is not owned by the beneficiary, and the trustee has sole discretion in spending the trust money.

“Those trustees have the absolute unfettered discretion on how to spend those assets,” Treeby says.

Henson trusts can be set up as “inter vivos” trusts, while the parents are still alive, or as “testamentary trusts,” which flow from a will. Income earned in an inter vivos trust is taxed at a higher tax rate than income earned in a testamentary trust.

Treeby sees 10 to 15 wills a month set up to benefit people with special needs. Although he is not a lawyer, he can quickly discern those that are unsuitable.

If absolute discretionary trusts aren’t set up in exactly the same way as the original Henson trust, they may not be recognized as such by the province, Treeby warns. Many lawyers have attempted to improve on the Henson trust over the years, he says, only to run into problems later on.

Although Treeby’s focus is in Ontario, the Henson trust structure has also been accepted in British Columbia, Saskatchewan, Manitoba, New Brunswick, Nova Scotia and Prince Edward Island. Disability support payments in these provinces can be protected by a Henson trust.

One pervasive myth about Henson trusts is that there is no point in putting more than $100,000 into one, because the beneficiary can withdraw no more than $5,000 from the trust each year.

It’s true that Ontario disability support program rules state the beneficiary can’t receive more than that amount in voluntary gifts in any 12-month period, or benefits will be cut off.

But, Treeby points out, a number of disability-related expenses are considered exempt items and can be purchased from the trust without affecting government benefits. They include attendant care, wheelchair ramps, lifts, wheelchair-accessible cars and even home renovations made for medical reasons.

“It certainly doesn’t give the trustees complete freedom,” Treeby says. But it does allow a greater latitude for spending than many think, he adds.

Often a trustee will get an expense approved as exempt. But it takes time for that item to make it onto an official list; as a result, many exemptions become known through word-of-mouth communication.

The person collecting ODSP may also hold certain exempt assets, including a principal residence, up to two vehicles (the second one is permitted only if used for employment), tools of a trade, student loans, a prepaid funeral and some compensation for pain and suffering.

According to Treeby, the person may also have the following assets:

> inheritance or the proceeds of an insurance policy of up to $100,000, held in trust (a disability expenses trust);

> cash surrender value of a life insurance policy up to $100,000, including segregated funds;

> inheritance or the proceeds of an insurance policy and other assets of unlimited amounts held in a Henson trust.

Finally, for families struggling to pay the expenses of raising a child with special needs, financing such a trust can seem impossible, especially when one parent frequently has to quit work to care for the child.

It’s no surprise that Treeby, an insurance broker, recommends life insurance as an affordable way to fund a Henson trust.

In particular, he recommends a joint last-to-die policy, which kicks in only when the second of two parents passes away.

Parents should be careful about trying to circumvent the ODSP regulations by using strategies such as leaving all of their estate to the siblings of the child with the disability, with the intent that the siblings should use the money to support the person with special needs.

This may not work, Treeby says: the Succession Law Reform Act requires that parents provide for financially dependent children of any age.

If parents don’t do so for adult children who remain financially dependent, their wills could be challenged in court.

Treeby offers these tips for advisors setting up Henson trusts for their clients:

> use a knowledgeable lawyer;

> don’t experiment with the wording. Follow the original Henson trust wording;

> select trustees carefully — a lot depends on them;

@page_break@> advise parents to keep the trustees informed of their intentions;

> ensure parents arrange for support for the trustees after the parents are gone;

> work through potential conflicts of interest among the trustees;

> provide adequate funding to the trust at the right time;

> build trustee succession planning into the trust document.

— LAURA BOBAK