How Can An Ontario Couple Ensure Their A Disabled Son Is Taken Care Of After They Die?

Anthony*, 62, and Chelsea, 61, have been enjoying retirement in Ontario for the past decade or so. Their biggest concern is ensuring the financial stability of their youngest child after they are gone. He has a developmental disability and is not able to manage his own finances.

To this end, their child receives Ontario disability support program (ODSP) benefits, Passport funding (an Ontario expense reimbursement program for adults with a developmental disability), and the Canada disability tax credit. Anthony and Chelsea contribute the maximum amount to his registered disability savings plan (RDSP) each year, which is now valued at about $100,000. They have a $700,000 insurance policy for him, and he will also receive 60 per cent of Chelsea’s government pension when she and Anthony die.

The couple has a will in place and both of their adult children will equally inherit their assets. The will includes a Henson Trust, which provides for disabled beneficiaries without disqualifying them from receiving government assistance. Their older child and a cousin will serve as trustees.

“Are we doing all the right things? Is a Henson Trust the way to go, given only up to $10,000 a year can be withdrawn?” Anthony and Chelsea also appreciate that when their child starts receiving Chelsea’s pension, ODSP payments will be clawed back. They wonder whether there is a way to ensure he can access the money that is being saved for his future and maintain government assistance?

While their son, who is 28, will continue to live with his parents until they die, they anticipate he will likely move to a retirement residence, and want to make sure he can afford to live comfortably.

To make sure they are preserving as much of their capital as possible for both their children when they inherit the estate, the couple would also like advice on the most tax-effective strategy to withdraw money from their registered retirement savings plans (RRSPs), which are fully invested in guaranteed investment certificates (GICs). Their plan is to reinvest what they withdraw into unregistered GICs and take the tax hit knowing they are in a low tax bracket, as opposed to waiting until their deaths and their children having to pay estate taxes at a substantially higher tax rate. Is this the right approach?

What the expert says

“Anthony and Chelsea are doing most of the right things to help provide for their son for life,” said Ed Rempel, a fee-for-service financial planner, tax accountant and blogger.

“At age 60, he can start withdrawing from his RDSP, which should then be valued at $400,000, assuming Anthony and Chelsea continue to maximize contributions and (assuming) a four per cent rate of return from GICs,” said Rempel. “At that point, with only fixed income investments, they should withdraw about 2.5 per cent a year or about $10,000 a year in income. That is roughly the equivalent of $4,000 a year today. This may seem surprisingly low, but GIC interest is barely above inflation.”

If Anthony and Chelsea both die in 30 or more years, when their son is 60 or older, he will also receive 60 per cent of Chelsea’s pension (assuming a typical pension that is about half of a typical salary of $60,000 to 80,000 a year) as well as their life insurance. Rempel does recommend the proceeds be placed in a Henson Trust and invested; assuming a similar four per cent rate of return, it will generate $7,000 a year in income in today’s dollars. He will also receive Old Age Security (OAS) benefits when he is 65.

The pension inheritance , assuming about $18,000 to $24,000, would be about equivalent to maximum ODSP of about $17,000 a year. “He will lose ODSP, but his income will likely increase to between $3,500 and $5,000 a month in today’s dollars — enough potentially to cover the costs for a basic retirement home but likely not enough for a retirement home that accommodates major disabilities, which today in Ontario can cost upwards of $5,000 a month,” said Rempel.

Assuming the RDSP is currently fully invested in GICs, Rempel said, “Investing in a balanced or growth portfolio would require advice for them, since it would be a significant change from GICs, but it should be able to increase the RDSP to $800,000 or $1.2 million instead of $400,000 and total monthly income to between $5,000 and $6,500 a month in 30 years. They will also be able to reliably withdraw four per cent a year from both the RDSP and insurance proceeds instead of 2.5 per cent.”

A Henson Trust is one of the best tools in Ontario to protect inheritances for individuals with disabilities, Rempel said. “It allows you to leave an unlimited inheritance without it counting as an asset for ODSP eligibility, which means the trust’s full value (even if millions) won’t disqualify him from ODSP or other supports. … The $10,000 limit is a common misconception. It’s not a hard cap on total withdrawals but rather the annual exemption for non-disability-related expenses.”

Rempel added, “In their case, the Henson Trust would be for the half of their estate their son would get plus the life insurance policy. A reliable long-term withdrawal from a $700,000 life insurance policy invested in GICs is about $17,500 a year rising by inflation. That is not a lot more than the $10,000 limit on non-disability expenses, so the $10,000 limit may not be a problem.”

As Chelsea’s pension will likely eliminate the ODSP income, since it only starts once both Chelsea and Anthony have died, their son should get ODSP until then. If he’s still receiving ODSP at age 65, OAS will likely claw back more than half of this income.

Rempel said Anthony and Chelsea’s best strategy to preserve capital and minimize tax is to start reinvesting RRSP withdrawals into unregistered GICs between ages 75 and 80. “At that time, they should each withdraw as much as they can while staying in the lowest tax bracket by keeping both of their taxable incomes below $58,000 a year.

“When they both pass away, their remaining RRSPs or RRIFs will be fully taxed, with the amount over $258,000 taxed at 54 per cent compared to their current marginal tax rate of 19 per cent. However, starting the strategy now instead of letting the money they will pay in tax grow inside their RRSPs will cost them more than paying the 54 per cent in 30 years. In addition, the GIC interest on the non-registered GICs they plan to buy would also be taxable every year.”

*Names have been changed to protect privacy.

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