It's Your Money  

Inheritances for 'disabled'

If you leave money or assets to a loved ones with disabilities, be sure to consider how that might impact their other financial resources, such as social assistance benefits.

Due to the volume of information to consider here, even a non-comprehensive summary won’t fit in one column, so I am going to split this topic up over the next two weeks.

This week, I wanted to start by explaining Henson Trusts.

Every province and territory has its own specific laws and regulations addressing social assistance and support programs, and most have programs directed solely at persons with disabilities.

The benefits provided can include a monthly stipend, specialized or subsidized housing, and/or medical benefits.

In order to qualify to receive this assistance, the person must show that he or she is “disabled,” and that he or she is in “need,” as defined in the applicable legislation.

In general, a person will not be considered in “need,” and therefore will not be eligible to receive disability social assistance, unless the person meets certain asset and/or income tests.

If the person inherits a significant sum of money directly (as opposed to indirectly, as a beneficiary of a trust), the inheritance could disqualify the person from continued assistance.

In most provinces and territories, if an inheritance is payable to a trust instead of directly to that person, and the terms of the trust are sufficiently “discretionary,” the assets will not be deemed assets of the person, and so will not affect his or her entitlement to government social assistance programs.

The trust may also be permitted to distribute up to certain annual amounts to the beneficiary without those distributions counting against his or her income limit.

As a result, if one of your intended beneficiaries is receiving social assistance benefits, it is usually best to leave assets to him or her through a fully discretionary trust, sometimes referred to as a Henson trust, instead of leaving assets directly to him or her.

This is a type of trust where the trustee (as designated in your will) manages the assets for the benefit of the beneficiary, but the assets are not legally owned by the beneficiary, and the trustee has the complete discretion to determine if, when and how much should be distributed to the beneficiary at any given time.

Even if the beneficiary is not currently receiving (and does not in future expect to receive) social assistance benefits or resides in a province or territory where discretionary trusts do not provide significant protection from an asset and/or income-test, there may be other reasons to use a discretionary trust for that person’s inheritance.

For example, if you want to leave assets to a beneficiary who is a minor, mentally impaired, or financially irresponsible, then using a trust will allow you to appoint someone who will manage that inheritance.

If the person is very dependent on caregivers, he or she might be vulnerable to financial abuse; appointing a trustee to manage their inheritance may help to reduce instances of financial abuse.

Further, using a discretionary trust may protect the assets within the trust from claims by a creditor or separated spouse.

The trustee of the Henson trust does not have to be the same person that you appointed as executor or liquidator of your will, but it can be.

Either way, remember that the trust is designed to last for the lifetime of the primary beneficiary – this could be several decades.

When appointing the trustee of this trust, you should consider appointing alternate trustees, in case the person you chose as primary trustee dies, resigns, or loses capacity before the trust has been wound up.

The persons you choose as primary and alternate trustees should be:

  • Mentally capable adults who are willing and able to act
  • Trustworthy
  • Have a relationship with the primary beneficiary or are willing to develop that relationship.

Ideally, the trustees should reside in the same province or territory as the primary beneficiary.

As mentioned above, this summary is by no means comprehensive and there are many additional details to consider before building a Henson Trust into your estate plans. Speak to a professional to see if this option is right for you.

And stay tuned for next week’s column where I’ll discuss a few other options to also consider.


Income tax during COVID

This year’s tax filings will likely prove move complicated for many due to pandemic-related benefits and work from home adaptations.

Although Canadians were given an extension to file their taxes last year, the deadline to file 2020 income tax returns remains April 30 (June 15 for the self-employed).

So what is different this year?

Reporting taxable COVID benefits

Millions of Canadians received pandemic related benefits in 2020 that must be reported on your tax return.

The CERB, CESB, CRB, CRCB and CRSB programs are all considered taxable income and should be reported on Line 13000 (Other income) on tax filings.

T4A and/or T4E slips have been issued by the government for these programs and although they should have all been sent in the mail, you can also view them on your “My Account” on the CRA website.

Understanding what is non-taxable

While the above-mentioned benefits are taxable, some other pandemic related relief is considered tax-free.

The government also delivered a number of other payments to some people including a GST/HST credit, OAS and GIS supplements and payments to people with disabilities which are not taxable and should not be reported on the 2020 return.

Certain provincial benefits such as the BC Recovery Benefit one-time payment are also not taxable.

Some will need to file for their first time

Children as young as 15 were able to apply for the CERB and some of them received as much as $14,000 in benefits, which are taxable. Many students may have also received the taxable CESB benefit as well.

Young people who received a government benefit of any type during 2020 need to confirm if they need to file their own tax return, even if they’ve never done so before.

Claim work from home expenses

The government announced two methods for claiming expenses related to working from home.

First, a flat rate of $2 per day to a maximum of $400 is available to employees who worked more than 50 per cent of the time from home for a period of four consecutive weeks or more.

No employer-signed form or supporting details are required, but the total amount you can claim using this method is quite small.

The second option is to use a more detailed method. Documentation of all eligible expenses is required as well as an employer-signed form T2200S.

Childcare expenses

For the 2020 and 2021 tax years only, the calculation of “earned income” will include both EI and any taxable pandemic benefits.

In addition, childcare expenses can be claimed for a period in which one or both parents are receiving EI or other taxable benefits.

This will inevitably be a challenging tax year for many Canadians to navigate but that does not mean you can put it off any longer. Missing the filing deadline is a bad idea, even if you don’t have the funds on hand to pay any taxes that are owing.

If needed, seek professional help in preparing your tax return, even if only for this year.

No-retirement plan blues

Are you into your 50s with no retirement savings to speak of yet?

If so, you are not alone.

I read somewhere recently that only 54% of “boomers” (currently those in the 55-75 age range) in the United States have any retirement savings at all. With Canadians unhealthy appetite for debt, many here at home are in a similar position.

While not an ideal situation, there are still plenty of things you can do. Sinking to despair and “giving up” because it is too late to start is not the answer. Instead, here are a few things you can consider doing to get back on track:

Get past the fear stage and reframe your thinking.

Instead of dwelling on past decisions or wishing you had started earlier, you need to think positive and take comfort in taking on action on the things you can control.

Any savings put away today is better than nothing and puts you farther ahead than you were the day before.

Look for ways to generate more income.

Do you have an opportunity to work a bit of overtime at your job? Maybe there is a way to attain a higher year end bonus or work towards a raise?

Maybe a side-business can generate some extra cash flow? And if you do earn some extra income, put 100% of it against debt or into your retirement savings instead of treating yourself for your extra hard work.

Reduce your expenses aggressively.

You need to take a hard look at your budget and where you spend money to see what can be trimmed. This includes both day to day spending as well as bigger ticket items.

Saving an extra $10 a day starting at age 50 translates to an extra $87,000 in your nest egg at age 65 (assuming six per cent rate of return). And don’t increase your debt load for any reason.

It is time to cut the kids off.

I know how much you love your children but if they are going to college or already grown adults, it is time for them to pay their own way.

If you are behind on your own retirement savings, this must take priority. As much as your heart is in the right place by trying to help them, the lessons they will learn now about managing money and taking on debt will help them for the rest of their lives and they will be less likely to have to support you in your later years.

Rethink your retirement plans.

This could mean working for a few extra years or even working part-time in retirement. Working for a few extra years has huge benefits.

Not only will you have some extra income to invest, you will delay dipping into what you do have saved and can also delay taking government pension programs for a few years increasing the amount you will receive.

If you find yourself behind on your retirement preparation, the single most important thing you can do is to create a comprehensive financial plan. I regularly hear people say that they “don’t have enough money saved to setup a financial plan,” but this makes no sense at all.

A proper plan will outline where you are today, what your future goals are and detail the steps you need to take to get there. No matter how dire your situation feels, the sooner you take action the better off you will be.


Rich also buy life insurance

Popular wisdom suggests that as people accumulate wealth their need for life insurance decreases.

However, permanent life insurance is a financial tool with unique tax benefits.

Many affluent families find significant value by using life insurance to protect and even enhance their wealth.

People buy life insurance either for temporary income protection or for long term wealth preservation. When you are young, life insurance is used to protect your family by providing money to replace your income.

However, as we approach retirement our need for income replacement lessens and the focus switches to wealth protection.

Wealth protection is a long-term concern, so it requires permanent solutions. Permanent life insurance is a tax efficient tool that many Canadians use for one of the three following concerns:

Estate preservation

Some Canadians have built up significant wealth in certain assets (such as RRSPs, second properties, businesses, etc.) that may trigger significant tax liabilities when those assets transfer to the next generation.

Where does the money come from to pay that tax bill?

Your beneficiaries could liquidate some of your assets or borrow the money. Or, prior to your death, you could try to save the additional funds required.

What if you funded that tax bill with insurance?

Insurance is typically the most efficient and effective solution as the money arrives tax free when needed most.

If you are concerned about a large tax bill when you pass away or that your beneficiaries may have to sell off estate assets to fund it, then you should consider an estate preservation strategy to preserve the value of your estate.

Estate equalization

Many Canadians have a strong desire to leave the value of their assets equally to their beneficiaries. But some have certain assets that are unique and destined for only one beneficiary (or a group of beneficiaries) such as a business or vacation property.

Blended families also often require estate equalization strategies to ensure each family line is protected and treated fairly. Even if estate preservation has been addressed, the nature of some assets can make it difficult to divide equally among your heirs.

Leaving certain assets to specific heirs is also likely to create inequality and friction.

To address these complexities, most affluent families find that life insurance is a cost-effective way to provide the liquidity needed to make estate values more equitable.

This solution is even more effective where a private corporation is involved. With an estate equalization strategy, the tax-free life insurance death benefit proceeds provide liquidity which helps balance out estate values while still achieving your asset distribution goals in a cost-effective way.

Estate maximization

Some Canadians have more income and/or assets than they will need for retirement and have a strong desire to leave a legacy.

Most people assume that investments are always the best way to increase the value of their estate. Others believe real estate or business ownership are the solution.

While all of these are useful, they do come with tax implications.

What if you were to move some of that excess money that may be attracting annual taxation into a life insurance contract?

An exempt permanent life insurance policy provides tax-deferred policy growth while you are alive and pays out tax-free on death to your named beneficiaries (or estate).

If maximizing the size of your estate is important, then you should consider an estate equalization strategy”.

With this strategy, you increase the size of your total final estate by moving surplus funds, which may be currently exposed to tax, into an exempt permanent life insurance policy.

You can potentially reduce the amount of taxes payable during your lifetime, avoid associated probate fees on the death benefit amount and create a larger pool of tax-free money at death, thereby maximizing your estate values.

As you can see, life insurance is an important financial tool, with unique tax benefits, used by many affluent Canadians, particularly when looking to optimize their overall estate plan.

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About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional director (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (formerly FPSC) in 2014, named as the board’s vice-chair in 2017 and took over as board chairman in 2019. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FP Canada board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected]

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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