Financial advisors with clients who have disabled family members must learn to navigate the complexities of government benefits and estate planning to serve their special needs.“When there’s a disability in the picture, financial planning becomes a much more complex process,” said Joel Crocker, Vancouver director of policy and planning at Planned Lifetime Advocacy Network, a national organization established by and for families committed to planning secure futures for disabled relatives. “Today, disabled people are outliving their parents, so providing for them is a real concern for these families.”

“It’s also a great opportunity to win these clients’ trust and their further business,” he added.

It is estimated that about one in 10 Canadian families has a family member with a physical or mental disability, so opportunities to work on behalf of disabled individuals may arise frequently. “Advisors need to know the issues disabled people face and brush up on strategies to help them,” Crocker said. “This means knowing what they don’t know, and enlisting professionals who can help them.”

“One of the biggest challenges is ensuring that government disability benefits are not lost or clawed back,” said Debbie Hartzman, a financial planner with Professional Investments Inc. in Kingston, Ont.

Many special-needs Canadians are unable to earn incomes in the workforce. As a result, many live in poverty, reliant on provincial benefits. “But government benefits are not only income support,” noted Brendan Pooran, principal at Toronto-based PooranLaw Professional Corp. who teaches critical disability law at York University and is a founding member of PLAN Toronto. “They also cover the costs of prescription drugs, vision and dental care, and transportation services. Drug bills can run up to $1,000 and more a month for some individuals.”

“Over the lifetime of many disabled persons, their families would have to pay between $400,000 and $500,000 for prescription drugs and services that are covered by income-assistance programs,” added Carol Bezaire, senior vice president, tax, estate and strategic philanthropy at Mackenzie Investments in Toronto.

Registered Disability Savings Plan

The introduction of the Registered Disability Savings Plan in 2008 was an important development in securing the financial futures of special-needs Canadians. “Canada is currently the only country in the world to have such a program,” Pooran said, “although the U.S. is looking to bring one out soon.”

The RDSP is a tax-deferred savings vehicle that allows Canadians under age 60 with prolonged disabilities that prevent them from working on a regular basis to set aside a lifetime amount of up to $200,000. Plan holders under age 49 may also be eligible for generous grants and bonds from the federal government. The Canada Disability Savings Grant matches every $1 put into an RDSP account with up to $3 if the plan holder’s net family income is below $87,907 in 2014. “That’s a real boost to savings for middle-income families,” said Aaron Keogh, president and financial advisor at Greendoor Financial Inc. in Windsor Ont.

Disabled Canadians with household incomes of less than $25,584 in 2014 are also eligible for the $1,000 Canada Disability Savings Bond each year for a maximum of 20 years. Those with net family income this year between $25,584 and $43,953 will receive a pro-rated amount.

“To maximize its benefits, it’s important to open a RDSP at an early age,” said Christopher Dewdney, a financial advisor at DWL Financial Services in Toronto, “because the grants and bonds can only be claimed before age 49.”

But despite its advantages, only a fraction of eligible Canadians have set up RDSPs. According to Human Resources and Skills Development Canada, a total of 91,981 RDSPs had been set up as of July 31. “About 500,000 Canadians have the disability tax credit and therefore qualify for the RDSP,” Crocker said, which means only 18.4% of them actually have RDSPs. “And there are many more Canadians who haven’t applied for the DTC.”

Lack of awareness

Lack of awareness is the reason for the slow uptake, Crocker said. “The RDSP is new, it’s not heavily promoted by financial institutions because it’s not a big money-maker compared with other savings programs, and it’s fairly complex with all its rules and regulations.”

“It really blows my mind that families with disabled members are told to pick up a phone and dial a 1-800 number to set up an account,” Hartzman said. “It’s a lot more complicated than that.”

The disabled person must first obtain a social insurance number, then apply for the Disability Tax Credit Certificate by filling out the Canada Revenue Agency’s Form T2201 with a health practitioner and submit the completed form to the CRA. When a certificate is issued, an RDSP can be set up at most major Canadian financial institutions. Mentally incapacitated individuals can include a spouse, a common-law partner or a parent as RDSP co-holders.

Estate planning

Careful estate planning is required to ensure that inheritances do not fall directly into the hands of disabled beneficiaries. The provinces regard inherited money as income when they calculate eligibility for income support. An exception is inherited homes, which are exempt if beneficiaries live in them.

“If a parent leaves $500,000 to a disabled adult child,” said Jackie Power, Toronto-based director, tax and estate planning, at Mackenzie Investments, “$200,000 could go directly into an RDSP and the rest could go into a Henson Trust.” Recognized in all Canadian jurisdictions except Alberta, the Northwest Territories and Nunavut, Henson Trusts are completely discretionary – their trustees make payments to beneficiaries at their own discretion – which means the assets in the trust don’t have an impact on the provincial disability benefit.

Each province has its own asset and income test for eligibility for disability benefits. In Ontario, claimants can have a maximum of $5,000 of liquid assets, and $7,500 of combined assets if living with a spouse. And they can only receive a monthly income of $200 from employment or investments. In British Columbia, a single claimant can have liquid assets of up to $3,000 and $5,000 of liquid family assets; single claimants can receive up to $800 in income a month and up to $1,000 of family income.

“Although there is no limit to how much can be left to a beneficiary in a Henson Trust,” Pooran said, “there is a limit to how much can be withdrawn before triggering a clawback in benefits.” Some provinces, such as Ontario, allow payments from a Henson Trust for disability-related expenses such as caregiving without any effect on provincial benefits.

Ten-year rule

Careful planning is needed in other areas to preserve disability benefits. A downside of the RDSP is its 10-year rule: if withdrawals are made within the first 10 years of setting up the plan, any grants and bonds that have been received must be repaid, which would have a huge impact on the value of the plan. Dewdney, however, sees the 10-year rule as a positive. “It ensures that the money stays in the plan,” he said. “The caregivers of the disabled person are usually the parents and they’ll probably pass away long before the plan holder. The money needs to be there for future use.”

People with shortened life expectancies, however, are allowed to withdraw savings from an RDSP without penalty.

“One solution for short-term needs,” Keogh said, “is to put some savings into a tax-free savings account. But money in a TSFA can trigger the provincial asset test and result in losing disability benefits. The parents can open a TSFA instead, but they may need an account of this kind to save for their retirement.”

Bezaire noted that, after 10 years, up to 10% a year can be withdrawn from a RDSP. “This could amount to $20,000,” she said, “so it should be withdrawn gradually over the year so as not to have $20,000 sitting in a bank account.”

A number of enhancements have been made to RDSPs in recent years. Upon the death of parents or grandparents, their Registered Retirement Savings Plans, Registered Retirement Income Funds and Registered Pension Plans can now be rolled into the RDSPs of financially dependent disabled children or grandchildren; this can result in big tax savings for the estate. As of this year, disabled individuals can roll their Registered Retirement Education Funds into their RDSPs if it can be determined that they will be unable to pursue post-secondary education. And a carry-forward measure allows plan holders to claim unused grant and bond entitlements from previous years.

Keogh said he suggests purchasing life insurance to help a disabled adult child after the parents’ death. “The payout can go directly into the RDSP, into a Henson Trust or to purchase a home.”

He encourages clients to plan for a disability by taking out life insurance and critical illness insurance at the birth of every child. “As time goes by, a $50-a-month payment can look very affordable.”

Support network

And he suggests that parents purchase disability insurance for themselves. “If they become disabled, they won’t be able to contribute to a child’s RDSP. I tell them to do it now and not to wait for a disability to happen.”

Pooran emphasized the importance of having a support network in place for a special-needs person after the parents’ death. “He’ll need friends, of course. He’ll also need lawyers, accountants, guardians and trustees to manage property,” he said, “and trusted people to hold power of attorney should he become incapacitated. And alternatives, in case some of these people can’t perform their duties.”