Do You Have a Henson Trust in Your Will for a Disabled or Incapable Beneficiary?

By Manda Ivezic

A Henson trust clause or paragraph is typically included in a Will in respect of a beneficiary who is or is likely to be a recipient of social assistance payments like the Ontario Disability Support Program (“ODSP”), due to being unable to work full-time because of a disability. This type of trust is also useful in the case of a beneficiary who is incapable of managing money, whether due to financial recklessness or mental incapacity. That beneficiary’s inheritance is managed under special terms outlined in the Henson trust provision.

The trustee invests the inheritance in a low-risk investment account and manages the money, determining what amount to pay out for the beneficiary’s living costs from time to time. To be valid and effective, this type of trust has the requirement of being fully discretionary, meaning that the trustee is given unrestricted decision-making power as to when and how much money to distribute to the beneficiary. Usually this trustee is the executor of the estate, but a different person can be appointed as a ‘special trustee’ to oversee the Henson trust inheritance. It may be a good idea to name alternate trustees as well to ensure there is someone around to manage the trust fund for the beneficiary’s lifetime.

The ‘Henson’ name comes from the court decision Ontario (Director of Income Maintenance Branch of the Ministry of Community and Social Services) v Henson, (1987) 26 OAC 332 (DC). The court’s decision in this case allowed this type of trust clause as a tool to allow ongoing eligibility for social assistance when receiving an inheritance, provided that the trustees have total discretion, so that the beneficiary did not have an enforceable interest in any particular sum under the trust. The instructions in the trust provision must not compel the trustee to give anything to the beneficiary or require the beneficiary to receive anything. Frequency and amount of distributions are left to the trustee to decide.

The Henson beneficiary can have input into the trustee’s decision-making, but cannot have unilateral authority over making payments. The beneficiary cannot have the ability to unilaterally collapse the trust and opt to instead take their inheritance outright either.

Advantage for Beneficiaries with Disabilities

Because of the trust’s discretionary nature, the court in the Henson case found that the trust fund could not be characterized as an asset of Ms. Henson - she did not have any particular entitlement and could not compel anything to be paid to her. Therefore, the fund did not disqualify her under social assistance rules.

The inheritance amount held in trust is kept out of the beneficiary’s “assets” per ODSP rules. The trust basically allows the beneficiary to be paid out money from their inheritance from time to time, though the payments out of the trust must not exceed the income limits established in the ODSP program. The advantage is that the beneficiary continues receiving disability support payments funded through the government, while also receiving supplemental income from their inheritance. The intention is that the trustee will distribute an amount which ‘tops up’ the beneficiary’s monthly income to the allowable maximum set by ODSP, or the trustee will make payments toward disability-related items or certain assets which are exempt from ODSP limits.

This arrangement is most important when the beneficiary's inheritance, if it were received directly as a lump sum, would be insufficient to live of off long-term (since the disability renders the beneficiary unable to earn adequate income), and yet would be high enough to disqualify the beneficiary from government support.

Advantage for Beneficiaries who are Incapable of Managing an Inheritance

A discretionary trust like this is also useful should a beneficiary be incapable of managing money on their own. It may not be desirable to give their inheritance outright, to their own control, for fear they would squander it. In that situation, the trust clause gives maximum flexibility to the trustee to determine what expenses are reasonable and not frivolous, and to cover expenses and provide for the well-being of the beneficiary as the need arises, without imposing restrictions - for example, no more and no less than a fixed amount released every month.

Considerations in a Henson Trust

Because a Henson trust must be fully discretionary, there are some quirks to drafting a Henson trust. Ontario’s Accumulations Act, R.S.O. 1990, c. A.5 says that a trust cannot continue to accumulate interest income past twenty-one years. New income generated after the twenty-one year mark must be paid out, not retained in the trust fund and compounded. Because the trust clause cannot require the trustee to pay anything in particular to the beneficiary, someone else must be named to receive this income going forward. Usually it is someone else in the family - for example, the siblings of the beneficiary with a disability or the beneficiary's children. The remaining capital of the invested inheritance continues to be managed for the benefit of the original beneficiary, until their death. The trust clause will also address who receives the balance of the fund, if the beneficiary passes before all funds are used up.

I had a client whose adult child adamantly did not want a Henson trust, as they wanted to go off of ODSP and simply receive their inheritance outright. I have also encountered a parent who preferred to set aside money in savings for their child during the parent’s lifetime, so that the child would not have to go on ODSP when the child reached 18. However, the parent had not considered that they were really disqualifying that child from having the option of ODSP in tandem with savings. Even if the child is prepared to manage a large sum and use it optimally for their own support, and not deplete it (which is not necessarily the case), the cash may be insufficient to last the child’s lifetime. Then they will have to apply for ODSP later on anyway, without the supplement of a protected inheritance. It is impossible to predict a beneficiary’s future circumstances, especially if their inheritance may be decades away, or to be certain what their future inheritance value will amount to down the road. Therefore, consider that it may be best to include a Henson clause to give the option of two income sources: a managed inheritance plus government support, rather than removing that option and risking the beneficiary being worse off. The trustee can later decide (at their full discretion) to collapse the trust and pay out the inheritance outright, if it happens that the beneficiary has adequate means of long-term support without ODSP. Aside from the Henson trust, to stash money in an optimal way for an individual with a disability, I would suggest making use of the Registered Disability Savings Plan, which can receive government contributions via the Canada Disability Savings Grant and Canada Disability Savings Bond.

Discussion with a lawyer can clarify an appropriate arrangement for your estate plan. If you are concerned with a beneficiary’s inheritance in your Will, contact Manda Ivezic at mivezic@sorbaralaw.com for advice or assistance.