Life Insurance and The Henson Trust

To a parent, nothing is more important than ensuring the welfare of your child.  Your children are your greatest joy — and your greatest challenge. Even after children have grown up, parents will always want to give them the best they can. Even when children pass away, parents want to make sure their children are looked after the best way possible. For the parents of disabled children, this is especially important, as their child may not have the means or the capacity to look after their own best interests. One option parents have in these situations is to set up what is called a Henson’s Trust.

As Jorge Ramos, the Director of National Accounts and Advanced Marketing at Industrial Alliance Insurance, explains, the Henson Trust was first created in Guelph, Ontario, in the 1980s, when a family there wanted to set up a trust for their daughter who was disabled. “It went all the way to the Supreme Court [of Ontario], as Revenue Canada challenged it and the family won the case,” Ramos explains. This victory paved the way for other families in similar situations to set up trusts to protect their loved ones’ interests. You can read the full story on this groundbreaking case here.

Jorge Ramos CFP CLU

Ramos elaborated that an absolute discretionary trust (or Henson Trust, as they are commonly called) is a type of trust that “is set up for disabled persons (children or adults) because they (the assets inside) are not able to be managed by the beneficiary or be managed directly by the beneficiary.” While many people with disabilities are able to handle their finances on their own, some may lack that capacity. Another point that Ramos raised about Henson Trusts is that because the assets in the trust are not directly held or managed by the beneficiary, they do not count as being owned by the beneficiary. This is one of the key reasons why people set up Henson Trusts — because they allow the beneficiary to still be provided for while receiving government benefits. In Canada, depending on the severity of the disability, disabled persons qualify for government assistance and subsidies. These can take the form of physiotherapy or extended health coverage, home care, or placement in an extended living facility. If the parent were to pass on without having a Henson Trust in place, or a Henson Fund formed through their will, depending on how large their estate was, their child’s benefits may be revoked. In Ontario, amounts over $5,000 (or, if they are exempt, up to $100,000) are enough to trigger this revoking without a trust in place. Benefits may not be restored until the assets diminish to a certain acceptable level. Also, if the trust is a testamentary trust (set up after the death of the parent), the assets inside — and any growth — may earn tax deductions.

Another interesting thing about this type of trust is the role that life insurance can play in them. As Ramos explained, “If a couple has a disabled child and they are afraid that the child can’t take care of themselves once they pass away, they can appoint a guardian. Even if a guardian is in place, having a life insurance policy that kicks in can create a trust to help support the guardian to take care of child.” This means that if there were a permanent or term life insurance policy in place at the time of death, as directed by the will, the death benefit could be converted into a sizeable portion of the Henson Trust, allowing the guardian to be paid for their services and also offsetting any unexpected costs the guardian or child might run into.

Now, like any financial vehicle, a Henson Trust may not be suitable for all situations. As Ramos pointed out, there are two main drawbacks to this type of trust. The first is that, like any trust, a trustee needs to be hired. Because the beneficiary may not be able to advocate on their own behalf, a lot of power is placed in the trustee’s hands, so families need someone who is trustworthy. In the case of Audrey Henson (the person whom the original Henson Trust was created for), the guardian was the Guelph Association for Community Living, the organization that managed the group home she lived in. As this is a financial position, it is important for families to choose carefully and select a trustee who can manage the assets appropriately. The trustee is responsible not only for managing the assets inside the portfolio, but also (unless specified in the will) for determining when money is withdrawn and how it is used. The trustee is also meant to act in the interests of the beneficiary. As well, depending on the age of the beneficiary at the time of the parent’s passing, the trustee may be handling the assets for over 40 years, so that is another point to keep in mind. Trusteeship is a position with “full authority,” and so many families either select a close friend or family member as a trustee, or in some cases hire a professional trustee to manage the trust.

The other drawback happens when the trust is set up while the parents are still alive. When a trust is set up inter vivos, or during a person’s lifetime, the trust will be taxed at a higher tax bracket, causing a loss of potential income and revenue.

Being a parent is a highly rewarding — and challenging — experience. When the child in question has a disability, those joys and challenges are magnified. In cases like these, parents often become their child’s advocate, speaking up for their needs and juggling many different roles so that their child can thrive. A Henson’s Trust is just one way that families can ensure that their loved one’s needs are met — even after they themselves pass on. A made-in-Canada solution, the Henson’s Trust offers financial relief and security to those who might otherwise not have them, and it brings parents and families the peace of knowing their child is taken care of.

For more information on life insurance and the Henson Trust, please contact us or call 1-866-899-4849.


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