What is an Absolute Discretionary or “Henson Trust”?
The most well-known and commonly used Trust among families of people with disabilities is the Absolute Discretionary Trust, more commonly known as the “Henson” Trust. It is a special type of Trust arrangement in which the Beneficiary is considered not to have any legal claim to the property held in Trust, and therefore, the property is not considered an asset of the Beneficiary when determining eligibility for ODSP. In short, a Henson Trust renders the property invisible to ODSP for as long as the property remains in the Trust.
It should be noted that a Henson Trust can take a number of forms and can be used in respect of a wide variety of assets. For example, a Henson Trust may be testamentary in nature (meaning that it is included in a Will or Trust deed that takes effect only on the death of the person establishing the Trust); it may be inter vivos (meaning that it takes effect during the life of the settlor); it may hold a residential property (as a type of housing Trust); or it may hold cash or investments.
What are the defining features of a Henson Trust?
- Absolute Discretion: Absolute discretion means that the Trustees of this type of Trust have total decision-making authority over whether or not to provide any part of the Trust (or income from the Trust) to the Beneficiary, when any such payments should be made, and how. Many families are put off by this requirement and would prefer an arrangement that would allow them to require payments from the Trust to the Beneficiary at certain times, for certain supports or services, or in specific installments. Unfortunately, it is just those types of restrictions and obligations that would give the Beneficiary a claim to assets that may be included for the purposes of determining eligibility for ODSP.
- Accumulation Period: The Trust must account for how any remaining income will be paid after the accumulation period has expired. The “accumulation period” is the period of time that a Trust may legally accumulate income in the Trust. In Ontario, the accumulation period is currently 21 years. After 21 years, any income must be paid out in the year it is earned. The issue in this case is that if the Beneficiary is in receipt of ODSP and all of the income from the Trust cannot be paid to or for the benefit of him or her without putting the Beneficiary offside the ODSP asset or income limits, then the income will need to be paid to someone else. A well-drafted Henson Trust will account for this eventuality.
- Death of Beneficiary: A Henson Trust must prescribe how any remaining portion of the Trust will be distributed on the death of the Beneficiary. Failure to account for the final distribution of the Trust will result in the Trust being considered an asset of the Beneficiary for the purposes of ODSP.
What is a Trustee of a Henson Trust responsible for?
The Trustee of a Henson Trust is responsible for the following:
- Overseeing the Trust assets for the benefit of the Beneficiary while they are held in Trust. This includes managing the assets and investing them prudently;
- Distributing funds from the Trust if and when the Trustee determines it is appropriate to do so. The Trustee has the discretion not to distribute any funds at all, or to distribute all of them to or for the benefit of the Beneficiary and wind up the Trust if the Trustee believes it is appropriate to do so;
- Keeping records and accounting for all the assets of the Trust, payments made out of the Trust, and income received by the Trust;
- Preparing annual reports for ODSP identifying income and disbursements from the Trust;
- Preparing annual tax returns for the Trust; and
- Distributing any remaining assets as you have instructed in the Trust when the Trust is wound up upon the death of the Beneficiary.
Note that families usually expect considerably more from the Trustee of a Henson Trust, such as legal decision-making for the loved one who has a disability, seeing to his or her personal care, coordinating support with agencies, acting as plan holder of an RDSP, or otherwise seeing to his or her well- being. These roles are in fact beyond the true mandate of a Trustee who is in fact only really responsible for the Trust assets.
Some of the responsibilities a Trustee is usually expected to undertake include:
- Where the Beneficiary will live (whether independently with supports, in a group home, or with the Trustee or a family member);
- Coordinating and managing supports and funding with local agencies and/or the Developmental Services Office (DSO);
- Managing the investments held in an RDSP;
- Determining how assets will be used to support the Beneficiary and what assets can or should be provided to the Beneficiary to improve his or her quality of life; and
- Overall responsibility for the Beneficiary’s needs and well-being.
These expectations and responsibilities are well beyond what an Estate Trustee is typically accountable for, and therefore many families choose to appoint someone other than their Estate Trustee to act as Trustee of a Henson Trust, or to act together with the person appointed as Estate Trustee, to bring to the table a wider variety of skills and qualifications.
How do I choose a Henson Trust Trustee?
The qualifications you may want to consider in determining who to appoint as Trustee of a Henson Trust include the following:
- Knowledge: The Trustee needs to be knowledgeable about the rules, regulations, and supports available to the Beneficiary. Specifically, the Trustee should understand the reason the Trust has been established and the asset and income restrictions under ODSP. The Trustee should also understand the other resources and supports that are available to the Beneficiary, such as RDSPs, tax credits, and various forms of individualized funding and/or base-funded supports. It is up to the Trustee to ensure that payments made from the Trust are balanced with other earnings and income, that tax savings are realized wherever possible, and that the Trust assets are not unduly depleted. Where the the Trustee does not have this breadth of knowledge, it is important that they seek out (and/or are directed to obtain) professional help.
- Understanding of the Beneficiary: Familiarity with and sensitivity to the individual’s needs and wants should underlie the decisions made by the Trustee. Ideally, the Trustee is someone who is an active participant in the Beneficiary’s life and who knows about his or her residential arrangements, health, and personal care needs, as well as those aspects of life that add to his or her happiness and general well- being. Whatever the case may be, it is a good idea to provide the Trustee with what we refer to as a “Life Plan,” which identifies where and how the Beneficiary will live, who the important people in the Beneficiary’s life are, contact information for support organizations, medical practitioners, and other community members who play a role in the care and support of the Beneficiary.
- Trustworthiness: There are few opportunities for oversight in the administration of a Henson Trust. The potential for a conflict of interest is a particular concern where the Trustee you appoint is also designated to receive what’s left of the Trust when the Beneficiary dies. The Trustee has a personal interest in not exercising his or her discretion to give anything to the Beneficiary. Where the possibility of a conflict of interest exists, it may be prudent to appoint multiple Trustees. Many families choose to appoint multiple Trustees to act jointly, thereby adding a degree of oversight that would otherwise be lacking.
- Longevity: The longevity of the Trustee is an important feature when it comes to Henson Trusts, which, depending on the size of the capital, could last for the entire lifetime of the Beneficiary. Once again, it is prudent to name at least one Trustee (or alternate Trustee) who is somewhat close in age to the Beneficiary. This may mean appointing someone who is currently a minor contingent upon that person attaining the age of majority, or such other age at which you believe they will be competent to act as a Trustee or Co-Trustee.
- Proximity: The Trustee’s place of residence is also a highly relevant factor. The ability of the Trustee to make informed choices about the administration of Trust funds may be reduced when the Trustee lives at a considerable distance from the Beneficiary. It is also much easier for the Trustee to manage any assets that form part of the Trust, such as a residential property, if he or she is nearby. It should also be noted that from a tax perspective, there may be concerns regarding how the Trust is taxed if the Trustee(s) resides outside of Canada.
- Dedication and commitment: The Trustee should be a responsible person willing to commit the time and energy required to properly and promptly administer the Trust and attend to the needs of the Beneficiary over a very long period of time, potentially the entire life of the Beneficiary. When considering this qualification, it is important to keep in mind any competing demands a potential Trustee has, such as to his or her own family, business or personal commitments, and if it is reasonably possible to balance those interests with the responsibilities associated with becoming a Trustee.
- Professional assistance: It is important that the Trustees of a Henson Trust know who to go to for help. The rules, regulations, and duties under which a Trustee must operate are very complex, and your average lawyer or tax advisor is not well versed on the ins and outs of ODSP.
What are the alternatives for appointing a Trustee for a Henson Trust?
As is the case for Estate Trustees, it is rare to find all of these qualities united in a single individual. Therefore, many families choose to appoint multiple Trustees to act jointly, sharing the responsibilities, acting as a check and balance on the exercise of discretion, and bringing to the table a broader spectrum of skills and qualifications.
Given the duration of a typical Henson Trust, it is also a good idea to appoint alternate or successor Trustees to act in the event that one or more of your original Trustees is unable to continue to act, either due to their death, incapacity, removal by the Court, or resignation for personal reasons.
Corporate Trustees, professional Trustees (such as a lawyer or law firm appointed as Trustee), professional Trustee supports (such as lawyers or accountants retained by your Trustees to assist with the Trust administration), and personal support networks or groups (comprised of family and friends of the family or the Beneficiary) can offer valuable alternatives or additions to the plan of care for your loved one who has a disability.
What do I have to pay a Henson Trust Trustee?
Unless you expressly prescribe the manner in which your Trustees may take compensation, compensation will be awarded by the Court in accordance with the Trustee Act. That Act allows Trustees to take “reasonable compensation” for their efforts and time, as approved by the Court.
The problem with the Tariff when it comes to a Henson Trust is that it does not necessarily reflect the time and effort involved in administering the Trust. The time and effort involved in administering a Henson Trust can be quite substantial and, in many cases, disproportionate to the mere monetary value of the Trust; as such, compensation based on a small fraction of a percent of the Trust value is often not fair or appropriate.
In recognition of this potential unfairness, the Courts have indicated that they will review whether the Tariff is appropriate in each case by considering the value of the Trust, the care and responsibility involved in the administration, the time expended, the skill and ability used in the administration, and the degree of success in the administration.