Article by Gregg W. Knudsen, TEP
A Henson Trust is a type of trust established primarily for the benefit of individuals with disabilities, particularly those who qualify to receive government benefits. The key feature of a Henson Trust is that it is designed to protect the assets held within the trust from being considered as assets of the beneficiary for the purpose of determining eligibility for these government assistance programs. The disability can be mental or physical. The term Henson Trust is named after the successful litigant in a landmark Ontario case. In Henson v. Ontario, the Ontario courts found that certain assets held inside of a fully discretionary trust are not to be considered in an assessment for benefits under a means-based government assistance scheme. Since the ruling in the Henson case, fully discretionary trusts structured to be outside consideration for government benefits, have been an integral part of planning in Nova Scotia.
A Brief Review of Trusts
In order to understand how a Henson Trust works, it is important to have a general understanding of trusts and how they function.
A trust is a legal relationship or arrangement in which a person or entity, (trustee), holds and manages assets for the benefit of one or more individuals or entities (beneficiaries). Assets held inside of a trust are typically money, investments, private company shares or real property, but legally, it could be any asset or property regardless of value. Trusts are established to provide a structured way to manage and protect assets, achieve specific financial or estate planning goals, and distribute assets to beneficiaries in accordance with the wishes of the person who created the trust (settlor). In cases where the trust created is created under a will, the person making the will is known as a testator or testatrix. A trust established during one’s lifetime is known as an inter-vivos or living trust while a trust created under a will is known as a testamentary trust.
Characteristics of a Henson Trust – “Mere Wish”
Since the Henson case was decided in 1987, the Henson Trust has been widely used as an estate planning strategy in Nova Scotia and indeed, across Canada. However, the case only received peripheral consideration by other provinces’ Supreme Courts (and none in Nova Scotia) until the Supreme Court of Canada decided a case in 2019 (S.A. v. Metro Vancouver Housing Corporation). In finding that the subject trust was a Henson Trust and not to be considered as part of the beneficiary’s financial assets, the Supreme Court summarized and clarified the following requirements of a Henson Trust:
- The trustees have ultimate discretion over the distribution of the trust assets for the benefit of the beneficiaries. That means that only the trustee(s) can decide what, if anything, can be distributed from the trust’s assets for a beneficiary. The court described the beneficiary’s right as a “mere wish” for assets, rather than an entitlement. It is important that the trust document not direct a fixed amount for the beneficiary. As will be explained later, the fixed amount will be included in the beneficiary’s calculation of assets or income.
- The beneficiary does not have the legal authority to require the trust to be fully distributed. This can be accomplished by appointing a beneficiary of the capital or remainder of the trust in the event the beneficiary dies before the assets are fully distributed.
Feasibility – The Law in Nova Scotia
Like other provinces in Canada, Nova Scotia has passed legislation dealing with eligibility for government assistance. Section 31 of the Regulations created under the Employment Support and Income Assistance Act stipulates when a trust fund is excluded from consideration in an application for assistance:
- The sum must be set aside for either (i) an applicant for assistance, (ii) the recipient of that assistance if they are not the applicant, (iii) the spouse of the applicant/recipient, or (iv) a dependant child of the applicant/recipient.
- The sum must be set aside by a person other than the applicant/recipient or dependant child, or pursuant to a court order.
- It must not be feasible to obtain support for the applicant/recipient/dependant child from the sum set aside in trust.
- The beneficiary must not pledge the trust assets as collateral for a loan.
If any of these criteria are found lacking, then the trust property is considered part of the assets of the applicant and therefore, they are considered in calculating the amount of benefits the applicant may receive. In other words, the amount of government assistance received will be less due to the way the assets are held in trust.
Note that neither the Henson case, the Supreme Court of Canada decision in S.A. v. Metro Vancouver Housing Corporation or s. 31 of the Regulations have been judicially considered in Nova Scotia (at least as the decisions relate to trust planning), so it is difficult to predict exactly how the courts here will treat Henson Trusts. From my experience, it appears that, for the most part, the relevant provincial government departments apply the regulations in a manner that is consistent with the principles of the Henson case.
Formal Requirements and Challenges of a Trust
The appointment of a trustee creates a fiduciary relationship, which is one of the most important relationships recognized in law. With that relationship comes a number of inherent duties including:
- Duty to act in best interest of beneficiary.
- Duty to obey the trust instrument – A trustee must follow the directions of the trust instrument and not exceed the authority set out within it.
- Duty to act with an even-hand between classes of beneficiaries especially when exercising discretion. For example, the discretion to pay to a beneficiary or invest assets a certain way, necessarily affects the amount held in trust for the remainder beneficiary.
- Duty of care – As with any position, there lies an inherent duty to take care when acting as trustee. This could include meeting tax filing deadlines, maintaining adequate insurance on real estate held by the trust, etc. The trustee can be held personally liable for negligent errors or omissions.
- Duty of loyalty, honesty and good faith – A trustee must not put their interests ahead of the beneficiaries or earn secret profits from the assets.
- Duty to act as a prudent trustee regarding investment of assets – Assets.
Given the nature and extent of the duties, it is important to find a trustee who can adequately fulfill these responsibilities. In addition, especially with Henson Trusts, the trustee must be willing and able to continue in that role for the duration of the term of the trust.
Tax Considerations
Income earned inside of a trust is usually paid out and taxed in the hands of one or more beneficiaries. The income is then taxed at the beneficiary’s personal marginal tax rate. However, if it is not paid out, the income earned, and capital gains triggered are taxed inside the trust at the highest marginal tax rate for the province. In Nova Scotia, that rate is 54% for non-dividend income, such as interest. There is an exception made for a Qualifying Disability Trust, which is a testamentary trust for the benefit of a beneficiary who qualifies for the Canada Disability Tax Credit. In that context, the income earned inside of the trust is taxed using the graduated tax rate. Other tax issues with trust are beyond the scope of this article. If it is not expected that the income can be taxed at a favourable rate, it is appropriate to consider what benefits can be gained from a Henson Trust (or any trust) when compared to the tax costs.
Preparing a Henson Trust
A Henson Trust, like all other estate planning strategies, should not be considered in isolation. The first question to ask yourself is, “do we need a Henson Trust?”. There are many reasons to create a trust for a beneficiary without implementing a Henson Trust. For example, a parent of a child under 19 years of age would create a trust in their will since that child lacks legal status to perform important trustee functions such as investing in certain assets or sign releases. Further, they are likely to lack the maturity to manage significant sums of money. In those cases, a discretionary trust would be appropriate for a minor beneficiary or even one who is a young adult who may not have the time or experience to manage a trust. For example, a university student may have the ability and desire to learn what is expected to manage and administer a trust, but they may lack the time, attention and impartiality necessary to manage a trust. That said, it is quite possible this beneficiary could be a trustee of their own trust once they have finished their studies and reach a mature age. Thus, this person should have a trust but not a Henson Trust.
Once you have determined the beneficiary is likely to continue receiving government assistance, it is appropriate to consider a Henson Trust. Below I have summarized how the trust can be structured.
Trustee(s)
In a preceding section, we discussed the importance of choosing the proper trustee. In some cases, it is both useful and appropriate to have a beneficiary as one of the trustees. However, this should be avoided when considering a Henson Trust. The beneficiary who is also an applicant/recipient or dependant child might still be a trustee. However, there must not be any possible way for that person to also be the sole trustee of a Henson Trust. Otherwise, it would be “feasible” for the beneficiary to receive income from the trust, thus disqualifying it as a Henson Trust. If the beneficiary is to be appointed, then they should be a co-trustee with someone else. In those instances, trustees must act unanimously, unless stipulated in the trust. In this case, you would not want the trust drafted to make any other stipulation besides unanimity.
Payment of Assets
The assets must only be available at the discretion of the trustee. The trust amounts payable cannot be for a specific defined amount or specific time (for example: $500 per month; all annual income). It must be structured so that the assets can only be paid out when directed by the trustee and that it is legally possible for the beneficiary not to receive any of those assets.
Gift-Over to Another Beneficiary
There is an ancient rule of trust law (circa 1841) known as “the Rule in Saunders v. Vautier”, which provides, in effect, that when all beneficiaries of a trust have capacity to consent to the distribution of a trust, they may make an application to court to compel the trustee to transfer all of the assets to the beneficiaries before the term of the trust has expired. In this instance, it would be considered “feasible” for an eligible beneficiary to receive assets from the trust. Therefore, the assets would be considered by the government when an application for assistance is made. However, by directing that any remaining assets are payable to someone other than the eligible beneficiary (or the beneficiary’s spouse or dependant child), such as a sibling or a charity, then the assets are not considered. Therefore, a gift-over and an appropriate remainder beneficiary are an important decision when planning a Henson Trust,
Henson Trusts in Context
Earlier in this article, I made the comment that Henson Trusts were not a strategy to be considered in isolation. It is important when undertaking any estate planning or planning for loved ones with disabilities to use all strategies to best effect, and not have them work at cross-purposes to each other. I have highlighted some of the features and planning points to consider when planning for a Henson Trust.
One of the most important points to remember is that Henson Trusts are part of a larger, professionally considered and implemented estate plan. At a minimum, this would include a well-drafted will, usually including trusts. The plan may include trusts outside of the will as well. Other important components include powers of attorney and personal directives. It may also include guardianship appointments for any minor children. There may be other more complex strategies which apply as well. Additionally, you may have Registered Disability Savings Plans and related financial strategies, which may offer different advantages and potentially more flexibility than a Henson Trust. These strategies should be designed to work together to obtain the maximum personal, legal or financial advantage for the beneficiary.
Summary
A Henson Trust is a valuable strategy as part of a larger comprehensive estate plan for families of persons with disabilities. As with any strategy, Henson Trusts must be considered in context to allow for the various strategies to work consistently rather than at cross-purposes. When implemented properly and with professional advice, Henson Trusts, like other strategies provide peace of mind to those persons planning to provide the most effective benefit for their family’s future. This can be most effectively accomplished with the professional expertise of a lawyer experienced in this field who can work with you and your professional advisors.
