Does one of your loved ones have a disability? When it comes to planning for their financial future and security, although there are other plans available the two most popular are, the RDSP (Registered Disability Savings Plan) and a Henson Trust. These are two very different financial tools with several advantages to both. Knowing the difference can help you choose the right combination for your loved one.
Henson Trust (General Overview)
A Henson Trust is a legal trust where assets are put away for someone who has a disability. The person with the disability has no access to these funds, and instead must have a trustee. A Henson Trust can provide additional income. Anything above the allowable maximum must have a valid reason or need to withdraw additional funds (e.g. housing, wheelchairs and other medical expenses).
The main consideration with the Henson Trust is that you have restrictions on taking money out. This is offset by the fact that you can set up a Henson Trust relatively quickly and it has the capability of handling large estate and financial assets. Although there are ongoing costs to running a Henson Trust, since you need a lawyer and an accountant to help the trustee manage the trust, the expense may be worthwhile. A qualified Henson Trust lawyer should be consulted.
An RDSP is a long-term savings plan made up of personal contributions and qualifying matching grants and bonds for people with disabilities. An RDSP consists of a plan holder (the person or persons running the RDSP plan) and beneficiary (the recipient of the proceeds).
The plan holder and beneficiary can be one and the same. Establishing an RDSP does not require a lawyer.
To establish an RDSP, the beneficiary must be a Canadian citizen with a social insurance number, they must be eligible for the disability tax credit and be under 60 years of age. Grants and bonds are only issued up to age 49. Personal income taxes need to be filed to calculate net family income for both the plan holder and beneficiary. Income tax needs to be filed back two years prior for the qualifying year and applies to high income, low income or no income.
Unlike the Henson Trust which has no dollar limits, the contribution to an RDSP is capped at a lifetime maximum of $200,000 in personal contributions although no financial contribution is required. The major benefit to an RDSP is the potential to receive up to $70,000 from matching government grants and up to $20,000 in bonds for low income families requiring no financial contribution. Grants and bonds are retroactive as far back as the disability tax credit qualification or 2008. Matching grants and bonds are not available for a Henson Trust.
There are no restrictions on what you spend your money on when you take it out. The money must stay in the RDSP for 10 years after the last year’s contributions to avoid any government claw back. At age 60 you are required to start taking out funds on a regular and or lump sum basis. A major added benefit is that it will not affect any ODSP (Ontario Disability Support Program) or government benefits.
Financial planning for your loved one can be complicated and stressful. As experts in RDSP’s, my team and I simplify the rules, calculations, reporting and processing for you. Contact us today to find out how we can help.