Case Study: Estate Planning for the Future of Disabled Family Members

Many people in their 40s and 50s are supporting both children and parents. They bear the weight of wondering what will happen to their dependants if they’re no longer able to provide for them. The following case study illustrates how estate planning can give you peace of mind.

The family

Samuel (50) is a professor of dentistry at the University of Toronto. He plans to retire in five years. His wife, Sarita (42), is an orthodontist who enjoys her work and plans to sell her practice in eight to 10 years. Their 10-year-old son, Harrison, has been diagnosed with autism and is blind. He’s thriving at his school with additional tutoring and guidance. Samuel also has a daughter, Alice (26), from his first marriage who has agreed to take care of Harrison should anything happen to Samuel and Sarita.

Samuel’s father passed away last year. His mother, Elizabeth, was recently diagnosed with Parkinson’s disease, which has progressed to the point where she is no longer comfortable living alone. Samuel and Sarita have decided to renovate their home so Elizabeth will have a self-contained unit with a separate entrance, kitchen, bathroom, and bedroom. The goal is to give Elizabeth privacy while also allowing her to develop a closer relationship with Harrison and ensure her family can help her with day-to-day matters as her disease progresses.

The plan

Estate planning ensures an individual can look after the people they care for during their lifetime and after they are gone. The first step in any estate planning process is to ensure all available tax credits are utilized to maximize the individual's income. If eligible, any dependants should also be sure to apply for the disability tax credit to maximize the value of the estate.

With Elizabeth moving in, applying for the disability tax credit opens the possibility of access to other tax credits that can potentially be transferred to Samuel and Sarita, such as the Medical Expense Tax Credit (for attendant care) and the Home Accessibility Tax Credit. This couple may also qualify for the disability tax credit for Harrison to offset the extra costs his care requires.

Samuel and Sarita may also qualify for the new Multigenerational Home Renovation Tax Credit to help offset the costs of building Elizabeth a self-contained unit. This refundable credit helps with the cost of renovating a dwelling to establish a secondary unit that enables a senior or an adult who is eligible for the disability tax credit to live with their primary caregiver.

Samuel and Sarita also set up a registered disability savings plan (RDSP) for Harrison. Contributions to the plan aren’t tax deductible, but they are matched by the federal government and grow on a tax-deferred basis. The maximum lifetime contribution amount is $200,000, creating a nice nest egg should Harrison stop receiving provincial benefits or need money for retirement.

With the RDSP in place for Harrison, options open for Samuel and Sarita’s registered accounts, such as a Registered Retirement Savings Plan (RRSP). For example, on the death of the second spouse there will be a full income inclusion of the registered plan.  There is an opportunity to transfer a portion of that fund on a tax-deferred basis through a named beneficiary designation into Harrison’s RDSP.

Harrison may be eligible for provincial disability benefits as an adult. This must be considered when planning how Samuel and Sarita’s estate will be dispersed, as the benefits can be lost if Harrison exceeds limits on an income or asset test. The test amounts are quite low; for example, in Alberta, the asset test is $100,000.

In addition to limited financial help, provincial disability benefits can also provide other much-needed assistance, such as support for housing and finding housing, and medical and dental benefits. To ensure Harrison retains those benefits, Samuel and Sarita should consider setting up Henson Trust in their will, appointing Alice as the trustee. 

A Henson Trust is absolutely discretionary. As the trustee, Alice can choose whether or not to allocate capital to Harrison. Because Harrison has no control over the funds, he has no claim on the trust and will retain his benefits, and Samuel and Sarita have peace of mind that there are funds available if there’s an emergency.

Samuel and Sarita will also need to name residual beneficiaries who will receive assets left in the trust upon the beneficiary’s death. Because Alice is serving as trustee for Harrison, the couple wants her to be the residual beneficiary. This may place Alice in a conflict of interest. Samuel and Sarita made Alice aware of this and ensured she understands the importance of keeping good records of her financial decisions for Harrison in case they are called into question.

Given that Elizabeth’s condition is likely to worsen, Samuel and Sarita also want to provide for her in their will. This can also be done through a trust, which gives them the opportunity to specify how the funds should be used.

Moving forward

Estate planning isn’t just one and done. As life goes on, circumstances change, and Samuel and Sarita’s plan will continue to develop.

Each family’s situation and needs are unique. Ensure you work with an experienced tax advisor and legal counsel to develop — as well as monitor — your estate plan to ensure it continues to meet your and your family’s needs.