The government’s quashed graduated tax rates for testamentary trusts after three years for all but disabled beneficiaries.
But that exception may not go far enough.
That’s because it only comes into effect when the beneficiary qualifies for the Disability Tax Credit (DTC), and not everyone who’s disabled does, says Ron Malis, an advisor with Independent Financial Concepts Group Ltd. in Toronto.
“People are under the misconception that if you satisfy the requirements of [provincial disability support programs, such as ODSP], you’ll satisfy the requirements of DTC by default,” he says. “That’s not the case. The two programs do not communicate with each other.”
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People must apply separately, and Malis says some don’t qualify for both. For instance, a client may have multiple sclerosis and draw from the Ontario Disability Support Program, but apply for DTC while the illness is in remission and be rejected.
And getting the DTC unlocks RDSP eligibility, “which can ultimately mean the government will pay up to $90,000 to that person over a lifetime,” he says. So administrators screen stringently.
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Malis is pleased the government recognized that “trusts aren’t only for the affluent; when you have a child with a disability it becomes a critical tool.” Many people with disabled children set up Henson trusts, which give trustees absolute discretion over how funds are used. “And the impact of a trust being taxed at the highest marginal rate means a decreased amount of income and support from that trust.”
But he’d prefer the exception apply to people who are eligible for either DTC or provincial disability support programs. He also notes that DTC eligibility does not have an income or asset threshold, while provincial support programs usually do.
How planning’s affected
Malis says many disabled people ignore the DTC “because they think they don’t need a tax credit because they don’t make much money.” The change in Budget 2014 provides another reason, besides RDSP eligibility, to apply for the credit.
If the client can’t get the DTC, “I wouldn’t toss out the Henson trust. I would just say there are other alternatives worth examining. Besides, often the Henson is just part of the toolkit.”
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If the testator’s main objective is to safeguard ODSP, for instance, Malis would tell the client that recipients can hold $100,000 in a combination of a segregated fund, cash surrender value of a life insurance policy and inherited funds in trust without affecting eligibility.
But if the primary objective is to ensure the beneficiary doesn’t spend his inheritance all at once, or if he needs assistance with money management, “I’d go back to the Henson trust, regardless of the tax [consequences]. Yes, the marginal tax might be higher, but when you weigh the different options, will the Henson trust last longer than the seg fund?”