Advisors are slowly beginning to understand the importance of registered plans for the disabled, but some say advisors should take a larger part in helping a client plan for a family member with special needs.“In fact, it’s critical the advisor plays that role because it provides an opportunity for greater planning in terms of the client’s entire financial affairs,” says Jamie Golombek, managing director, tax & estate planning at CIBC Private Wealth Management in Toronto. “If you know a client has to plan for a child with a disability, for example, then you know how much cash he can save for other things – such as retirement, RRSPs, TFSAs – and how much they have to budget for their other kids’ post-secondary education.”
Two of the most well-known estate planning vehicles are Registered Disability Savings Plans (RDSPs) and Henson Trusts.
Registered Disability Savings Plans
RDSPs first became available in December 2008. They offer Canadians with “severe and prolonged” disabilities and are eligible for the disability tax credit – or those who support them – with a way to set aside up to a lifetime $200,000. The great benefit here is that the plan holder may also receive generous grants and bonds from the federal government. How much generally depends on the age of the beneficiary: if under 18, family income may come into play, but over 18, his or her own family income is used.
The Canada Disability Savings Grant (CDSG) provides matching grants of up to 300 per cent, depending on the amount contributed and the beneficiary’s family income. The maximum is $3,500 each year, with a lifetime limit of $70,000. The Canada Disability Savings Bond (CDSB) is for low and modest-income Canadians. If a person qualifies for the bond, he can receive up to $1,000 a year from the federal government, with a lifetime limit of $20,000. Contributions don’t even have to be made into the RDSP to receive the bond.
“So you put up $30,000 and they give you $90,000,” says Mr. Golombek. “That’s a great deal – why would you not do that?”
He cautions against putting in the entire lifetime amount in one go because that would only entitle the holder to one year’s worth of the CDSG.
Investments within the RDSP generally grow tax-free until money is taken out. While contributions are not tax-deductible, the disability benefit that qualifies the person to have an RDSP is a non-refundable tax credit that can lower the amount of tax paid.
Generally speaking, contributions can be made up to the end of the year in which the beneficiary turns 59. However, CDSGs and CDSBs are paid into the RDSP only up to the end of the year in which the beneficiary turns 49.
As of Dec. 31, 2011, RDSP assets totalled almost $560 million in just over 59,000 accounts, according to Investor Economics.
Human Resources and Skills Development Canada says that between December 2008 and February 2012, the federal government had contributed close to $300 million in grants and $145.7 million in bonds.
“The number of people who have opened up an RDSP is very low – I would say shockingly low,” says Mr. Golombek. “And I would have thought that by now it would be second nature to set one up for every single person with a disability because there’s an automatic grant that’s available from the government – at a minimum it’s going to be $1,000 a year and it certainly could be more depending on the family’s income.”
Mr. Golombek suggests one of the reasons for the low pickup rate lies in the complexity of the RDSP requirements, especially withdrawal regulations. As well, at one time, an RDSP was only available through banks, although that has now expanded to a number of other advisor channels.
“But what isn’t complex is the grants, which is free money,” he says. “So while some of the rules are complex – what if you are no longer disabled? what happens when someone dies? – the basic rules on the free money is pretty straightforward. Every advisor should be recommending this to their clients. I bring it up at every single meeting: I ask: is there anyone in the family with a severe disability? If so, the first thing I tell them is to get an RDSP. It’s more important than an RRSP, a TFSA and an RESP.”
Specified Disability Savings Plan
A new measure, called the Specified Disability Savings Plan (SDSP), has recently been created to provide beneficiaries who have a shortened life expectancy (not more than five years) with greater flexibility to access their savings from an RDSP. The SDSP rules generally apply to the 2011 and subsequent tax years.
In the March federal budget, the government said it would provide more flexibility to parents to transfer money from an RESP to an RDSP. In addition, the government says it will work with the provinces for a more efficient process for opening up accounts for those who lack “contractual competence,” and in the meantime, has expanded who can be the placeholder of the RDSP. As well, the government said it was replacing the current obligation to repay grants and bonds withdrawals within the 10 years preceding a withdrawal with a requirement to repay them at a fixed ratio to the amount withdrawn.
The second major form of savings for a person with special needs is what’s known as a Henson Trust, classified among the most tax-efficient ways to provide peace of mind to a parent of a disabled child, says Kenneth Pope, an Ottawa lawyer who specializes in wills and estates.
“Since ‘know your client’ is often the preliminary step when meeting new clients, make a stellar first impression by taking into serious consideration ‘know your special needs client’ where appropriate,” Mr. Pope writes in a chapter he contributed to T.A.S.K. The Trusted Advisor’s Survival Kit.
The trust is named after a Guelph, Ont. parent who attempted to provide for his special needs daughter. In 1989, an Ontario court ruled that the funds in a Henson Trust cannot be counted when the asset test is made to decide if the special needs person can receive benefits from the Ontario Disability Support Program. That has since extended to virtually all other provincial disability plans, making the Henson Trust a very desirable form of savings.
As well, Henson Trusts, which need to be set up by a wills and estates lawyer, are not solely for those with disabilities, do not require a minimum amount of money and are unlimited in amount of assets. In fact, says Mr. Pope, many people who are not wealthy in life can leave a beneficiary a substantial sum. For example, a person may live in a modest home and live off their RRIF. But that home could well be worth $500,000 – or more – leaving behind a generous inheritance.
Minimize the tax bite
Trusts are well known to minimize the tax bite. Take the case of a person who has received a trust set up through a will (a testamentary trust). The income will be declared in the hands of the trust at a marginal rate of 22% on the first $40,000, which is typically better than the person declaring the income on top of their own personal marginal tax rate, says Mr. Pope.
Advisors should use a combination of tools to help those with special needs, he adds. RDSPs and Henson Trusts can – and should – be used with other investment vehicles, such as insurance and segregated funds, to help build a solid financial plan.
While the Number One premise behind RDSPs and Henson Trusts is to provide for a person with special needs, there could be fringe benefits for advisors. Mr. Pope says the advice provided to clients on Hensons Trusts and RDSPs could well spark further requests for financial assistance in areas such as buying insurance and/or mutual funds, among other products. Other family members who have seen the value of the advice that advisors have provided to someone with special needs, may also need financial advice. “To ignore this niche market is unwise,” he says.
Further government information on RDSPs can be found at www.cra-arc.gc.ca or www.servicecanada.gc.ca. For more on Henson Trusts, contact a wills and estates lawyer.