Estate Planning and Trusts for Beneficiaries with Disabilities

I am wondering who I would reach out to for estate planning advice. I have a family member on permanent disability (independent living) and wish to arrange a trust upon my death that would not interfere with his monthly support ceiling of one thousand dollars a month (the current income is approximately one thousand four hundred).

Would this be a financial advisor question or an estate planner question?

—Libbie

Lawyer, financial planner, estate planner? Who’s best for estate planning, income tax, investments and more?

When planning to protect a loved one who receives means-tested disability benefits, several areas of expertise overlap: estate planning, taxation and investment strategy. You’ll typically consult an estate lawyer for legal structure and wills, an accountant for tax planning, and an investment advisor for ongoing investment management. A credentialed, fee-only financial planner can coordinate these elements and make recommendations, but they often still rely on specialized lawyers and tax professionals to implement legal or tax-sensitive steps.

To create a trust that preserves government benefits, a lawyer can draft either an inter vivos trust (created during your lifetime) or a testamentary trust (created by your will, taking effect after death). In your situation, Libbie, you described a trust triggered by your death — that is a testamentary trust included in your will.

What is a “Henson trust”?

A commonly used discretionary trust for beneficiaries with disabilities is the Henson trust. Named after a landmark Canadian case, a Henson trust is a discretionary testamentary trust designed so the trust assets are not treated as the beneficiary’s own property for the purpose of determining eligibility for means-tested government benefits. Properly drafted Henson trust language gives trustees discretion over distributions, which helps protect the beneficiary’s access to programs that limit benefits by income or assets.

Not every estate lawyer has in-depth experience with disability trusts, so seek a lawyer familiar with Henson trusts and disability benefit rules in your province.

Tax planning for a disability trust

Trusts must file income tax returns and pay tax on income they earn. However, tax planning inside the trust — such as allocating income to beneficiaries or structuring distributions — affects both tax outcomes and benefit eligibility. A well-drafted disability trust that qualifies as a Qualified Disability Trust (QDT) in Canada can be taxed at graduated personal rates rather than the flat top trust rate, which can reduce tax costs.

Trustees should work with an accountant experienced in trust taxation once the trust is active. They will advise on which types of income can safely be allocated to the beneficiary without jeopardizing benefits, whether tax-free principal distributions are preferable, and how to report different income sources.

How to use an RDSP for estate planning?

An additional tool to consider is the Registered Disability Savings Plan (RDSP). If your family member qualifies for the Disability Tax Credit (DTC), they or an eligible holder can open an RDSP. RDSPs allow tax-deferred growth and can receive government grants and bonds, especially if contributions begin while the beneficiary is younger. These matching grants and bonds can significantly increase the value of contributions.

RDSPs can be funded up to a lifetime limit (currently $200,000), which applies to all contributions and allowable transfers. In some cases, an RRSP or RRIF can be left to a financially dependent child or grandchild and transferred to an RDSP on a tax-deferred basis. Withdrawals from RDSPs are generally treated in a way that has limited impact on many income-tested government benefits, making RDSPs a helpful long-term vehicle for preserving supports while building assets.

Leaving an inheritance to a beneficiary with a disability

Large inheritances require careful planning. If trust income is allocated to a beneficiary and taxed in their hands, the additional reported income may reduce means-tested benefits, so trustees and tax advisors must weigh tax savings against the impact on benefits. The type of investment matters too: dividends, interest and capital gains are treated differently for tax purposes and can appear differently on benefit assessments.

For example, eligible Canadian dividends are grossed up and accompanied by a dividend tax credit, which can increase the income figure reported on tax forms used in benefit calculations. Capital gains are only partially taxable (50% inclusion), which often makes them a more benefit-friendly form of growth. An investment strategy that emphasizes tax-efficient growth and defers or converts income into capital gains can help preserve entitlement to government supports.

Who is the best person to plan an estate for a beneficiary with a disability?

Your situation calls for a multidisciplinary approach. A lawyer who specializes in estate planning and disability trusts is usually the best starting point to draft a will and any testamentary trust language (such as a Henson trust). After the legal documents are in place, an accountant experienced in trust taxation and an investment advisor who understands tax-efficient strategies for beneficiaries on means-tested benefits should advise the trustee.

Choose a trustee you trust — someone willing to consult professionals after your death and manage distributions in a way that balances your loved one’s financial needs, tax outcomes and eligibility for government supports.