The Testamentary Henson Trust: Importance, Use, and Relevance
By: Nicholas André, Articling Student & NIKA Guest Blogger, Lior Magalashvili, 1L Law Student (Ryerson Law)
For those of us with a loved one who has special needs, a Henson trust may be an advantageous piece of the estate planning puzzle. When structured appropriately, Henson trusts provide financial security for eligible loved ones and can alleviate some of the stress surrounding what may happen on your passing.
Trusts are a common part of estate planning and describe a relationship between those that hold or manage certain property or assets (aka the “trustees”) and those that will benefit from those assets (aka the “beneficiaries”). The rules of engagement with respect to how long the trust will exist and the types and amounts of distributions that can occur are all defined by the person who created (or settles) the trust in the trust instrument or document created at the time. Many trust instruments are in fact, the settlor’s last Will and Testament.
What’s special about a “Henson” trust?
A Henson trust first and foremost, is ‘testamentary’ in nature. That is, it is created under and pursuant to a Last Will, and comes into existence, after the death of the settlor. Second, the Henson trust is structured to give the trustee (or trustees) absolute discretion over the distributions of income and capital held for the benefit of the named beneficiary. The absolute discretion of the trustee, or in other words full control to determine what payments are made ensures that the assets held in trust do not actually vest in the beneficiary. What?
The term “vesting” is simply a more formal and legal way of saying that the beneficiary’s right /entitlement to the trust assets has come to fruition. This should seem nonsensical to you. Why would you set up a trust for someone only to ensure that their ‘right’ to the assets does NOT vest? The reason is primarily to protect and preserve a special-needs individual’s entitlement to vital government benefits, such as from the Ontario Disability Support Program (ODSP). With programs like ODSP, in order to qualify – the individual must fall below a certain level of income and net worth. With a Henson trust, the beneficiary’s personal assets and worth will not increase in value, as the trust does not mandate distributions to the beneficiary. This is the key.
In addition to protecting ODSP entitlements, a Henson trust is designed to ensure that the assets are managed and invested in a sensible manner on behalf of the beneficiary who would otherwise be unable to do themselves – and are generally intended to endure for the lifetime of the beneficiary – in so far as there are assets remaining.
History of the Henson Trust
Henson trusts get their name from the Ontario case, Ontario (Ministry of Community and Social Services, Income Maintenance Branch) v. Henson. In Henson, Audrey Henson was “mentally handicapped” and living in a specialized residence, subsisting on an Ontario government allowance. The ministry attempted to claw back Ms. Henson’s benefit payments because her father had set up a trust for her in his will worth $82,000.
The court ruled that Audrey should continue to receive the government benefits because she had no vested interest in the trust assets given that the trustee had absolute and unfettered discretion over the assets and power to make or not make distributions therefrom. For instance, Audrey could not compel the trustee to make payments to her at any time and for any reason. In 1989, the decision was affirmed, and subsequently, the Henson trust has become an established mechanism used by estates practitioners in the drafting of Wills.
The Henson trust has been used in several situations since its establishment. Recently in a Supreme Court of Canada (“SCC”) decision, in S.A. v. Metro Vancouver Housing Corp., S.A., a tenant in a housing complex operated by the Metro Vancouver Housing Corp. (MVHC), was denied rental assistance because she was the beneficiary of a testamentary trust that held $25,000. At issue was whether S.A.’s interest in the trust was to be treated as an “asset” in determining S.A.’s eligibility for MVHC’s rent subsidy. Ultimately, the SCC decided that the money in the S.A.’s trust was not considered assets that she could ever rely upon to utilize towards her rent as defined in MVHC’s Rental Assistance. As in the namesake case, S.A. could not compel the trustees to make such payments to her from the trust.
Practical Considerations – Who should be the trustee?
The absolute discretion of the trustee when it comes to making distributions to the beneficiary is one of the requisite characteristics of the Henson Trust. Consequently, it is vital to properly think thorough who is best for this role. Should the trustee be an individual? Or a professional – such as a trust company? Remember that Henson Trusts usually exist for a beneficiary’s lifetime. Will the trustee you have in mind survive this? If not, who will take over? How trustworthy is your prospective trustee—do they have a conflict of interest?
Henson trusts exist for the lifetime of the beneficiary; therefore, the trustee may not outlive the beneficiary. Settlors must think practically and implement a successive trustee plan – such as for example, appointing someone who may currently be a minor as an alternate trustee, of course, contingent on attaining a suitable age. Moreover, appointing a professional, such as a trust company may be advantageous, not only for their professional expertise but for their seemingly perpetual existence.
For Henson Trusts established for a child of the testator, it is common and very natural for them to think of their other (non-special needs) child or children to be appointed as the trustee. At the same time, these children may (and usually are) also the residual /contingent beneficiaries of the Henson Trust – to receive any remaining funds in the trust after the original beneficiary’s passing. However, this structuring creates an inherent conflict of interest as the trustee may be motivated to preserve more capital of the trust assets for themselves. Wherever possible, conflicts of interest should be avoided. Even the most trustworthy trustees can be enticed by future beneficial interests. As estate litigators, we have seen devoted caregivers become money hungry!
Henson Trusts were borne out of the desire to provide for the special needs of loved ones, whoever is appointed should also be familiar as to what those special needs are and how they may change over time. This does not mean the Trustee must be a specialized expert, but they should have knowledge of why the trust has been established and the rules and regulations concerning the beneficiary’s entitlements. Tax credits, government programs, and other income should all be accounted for to ensure the longevity of funds. To this end, directing the Trustee to work with certain qualified professionals may be helpful.
The proximity of the Trustee to the beneficiary will have a significant impact on urgent decision making. Long-distances also prohibit meaningful interaction which may be necessary to understand and act on the needs of the beneficiary. Further, various tax implications exist when Trustees exercise the central management of the trust outside of Canadian jurisdiction. While the residence of the trustee does not always determine the residence of a trust, the Canada Revenue Agency
has on balance ruled the trust as a resident in the jurisdiction of where the trust is mostly managed from. Proper structuring of the trust, such as having multiple trustees, can help mitigate against an unfavourable determination in this regard.
Henson Trusts have cemented their place as an estate planning strategy for special-needs beneficiaries. Fundamentally, the absolute discretion of a trustee distinguishes a Henson trust and ensures long-term financial protection for our vulnerable loved ones. As demonstrated in S.A., the original principles that allowed for the recognition of a Henson Trust endure, but practical considerations should always be at the forefront of the trust’s creation. Engage with the right professionals before you embark on this path—as the proper structuring of a Henson Trust in your Will is essential for your objectives to ultimately be achieved.