The Henson Trust: A Clever Estate Planning Tool with a Heart

By Mirjana (Mira) Markovic

Planning the future of a loved one with a disability comes with unique challenges. Families wish to provide financial security, but direct inheritance can inadvertently cut off access to essential government support such as the Ontario Disability Support Program (“ODSP”). The Henson Trust is one of the most powerful tools in Canadian estate planning to address this problem.

The Henson Trust owes its name to the landmark Ontario case, namely, Income Maintenance Director. v. Henson[1] . In this particular case, Mr. Henson wished to ensure that his daughter, who had an intellectual disability, would be provided for after his death.  In his Will, Mr. Henson set up a discretionary trust, meaning that the Trustee had complete control over whether, when, and how much money would be distributed to his daughter.

The government argued that the trust was an “asset” of the daughter, which would disqualify her from receiving benefits. The Ontario Court of Appeal rejected this and said that because the daughter had no enforceable right to the funds, she could not demand the money from the trust; therefore, the assets were not hers. This pivotal decision allowed the daughter to remain eligible for government support while also benefiting from the trust.  

Since that time, the Henson Trust has become the gold standard in planning for beneficiaries with disabilities in Canada.

Key Features of the Henson Trust

• Absolute Discretion of the Trustee: The trust document must clearly evidence that the Trustee(s) have absolute discretion.
• Not an Asset of the Beneficiary: The Beneficiary has no enforceable right to demand funds.
• Supplemental Use: The funds are used to improve quality of life (i.e., therapy, vacation, special equipment) and not basic needs already covered by government benefits.
• Longevity: Such a trust typically lasts for the lifetime of the beneficiary. The trust document must clearly state that the trust is for the beneficiary’s benefit during their lifetime.

Steps in Setting up the Henson Trust

1. Decide when to set up the Trust:

• Testamentary Trust (created through a Will): It comes into effect when you pass away. This is the most common method, as it is funded by the inheritance you leave.
• Inter Vivos Trust: This is set up while you are alive. It is funded right away with money, investments, etc.. It is useful if you wish to start assisting a loved one with a disability during your lifetime.

	Inter Vivos (while alive)	Testamentary (through a Will)
When it starts	During the testator’s lifetime (immediate)	After the testator passes away via a Will
When it ends	At the beneficiary’s death or the 21-year rule	At the beneficiary’s death or the 21-year rule
Funding Source	Assets transferred while the testator is alive	Inheritance via Will
Common use	Supports the beneficiary right away	Supports the beneficiary after the testator’s death

*Testator: a person who makes a Will.

2. Choose a Beneficiary: This is the person who will benefit from such a Trust.

3. Appoint the Trustee(s): This is the most important decision. The Trustee(s) will control the money and decide how to use it. Often, these are trusted family members, friends, or professionals. They must be people who will act in the best interest of the beneficiary and understand their needs.

4. Fund the Trust: Decide which assets will go into the trust [i.e., cash savings, investments, stocks, bonds, mutual funds, life insurance proceeds (naming the Trust as the beneficiary of the policy), real estate, etc.].

5. Draft the Trust Terms: Your Wills and Estates Lawyer will carefully craft specific wording to make sure the Trust is recognized as a Henson Trust.

6. Provide a Letter of Wishes (Optional): This is a non-binding document to guide Trustee(s) on how you would like the funds to be used. However, it does not remove the Trustee’s discretion.

7. Plan for the Future: Decide what happens to the leftover funds when the disabled beneficiary passes away. Usually, the Trust will specify an alternate beneficiary so that the balance will go to. Also, ensure that there is a backup Trustee(s) in case the original Trustee(s) cannot continue.

Steps Simplified

• Decide when to set up the trust.
• Choose a beneficiary.
• Appoint a Trustee(s).
• Fund the Trust.
• Draft the Trust terms.
• Provide a Letter of Wishes (Optional).
• Plan for the future.

Ontario’s Rule Against Perpetuities (The 21-Year Rule)

In most provinces, including Ontario, a Trust cannot last forever. By law, a Trust must vest (i.e., end or distribute) within 21 years after the death of the last surviving beneficiary alive when the Trust was created.

Since the beneficiary in the Henson Trust category never has a vested right and the trust ends on their death, this rule does not pose an issue. However, it becomes an issue if there is a gift over after the beneficiary passes away. For example, if the gift over clause is drafted as follows, “On my daughter’s death, the Trustee shall hold the residue until each of her grandchildren turns 35 years of age. Under section 4 of the Perpetuities Act, Ontario follows the wait-and-see approach, meaning that we do not strike down a gift right away just because it might vest too late. We wait to see if the gift actually does vest. However, it cannot continue longer than the period permitted by the said Act. A Henson Trust will usually include a clause to this effect to ensure that the Trust does not accidentally last longer than Ontario law allows.

A gift over clause is not mandatory, but it is strongly recommended because such a clause indicates what happens to the Trust if the beneficiary passes away before the Trust is fully used. Without such a clause, the Trust could be considered to end without clear direction, increasing the risk of dispute and litigation. Including a gift over clause is future-proof and will reduce such risk.

The bottom line: This rule is not an issue when the beneficiary under a Henson Trust is alive; however, if there is a gift over clause after their death, it must be crafted carefully with this rule in mind. The wait-and-see rule and appropriate gift over clauses usually prevent failure, but as indicated, careful drafting is essential.

Why Families Choose the Henson Trust

Without a Henson Trust, leaving a direct inheritance for a loved one with disabilities can backfire. Assets over $40,000.00 under the ODSP rules can cause the beneficiary to lose access to monthly benefits and drug coverage. Such a trust allows families to support rather than replace government programs, giving their loved ones security.

Conclusion

The Henson Trust is more than a clever legal tool. It is a safety net that balances compassion with careful planning. It is rooted in Canadian case law and is widely accepted across the country. It ensures that a disabled beneficiary’s government benefits are preserved while enhancing their quality of life. It is a vital strategy for families navigating the complexities of estate planning.

I hope that this article has provided you with some helpful information. If you have any questions, please do not hesitate to contact me directly at mira@sorbaralaw.com.