New legislation in Alberta means Henson Trusts are back as a planning tool

Alberta’s Assured Income for the Severely Handicapped Program (AISH) provides financial and health benefits to qualifying individuals with a disability. In 1999 the AISH legislation was amended so that a person’s interest in a trust were included in the person’s asset calculation that helped determine their eligibility for provincial disability benefits. This change to the how a person’s income was calculated meant many disabled individuals lost their disability benefits, and trusts were no longer an effective financial planning option for disabled people.

Henson Trusts are one type of trust commonly used as an estate planning tool for disabled individuals.

In a Henson Trust, the trustee has absolute discretion as to when and how much money will be received by the trust’s beneficiary. Because the beneficiary has no control over capital or income of the trust, any government funds a disabled beneficiary might be receiving are continued.

The Henson trust gets its name from the 1989 Ontario Court of Appeal decision, Ontario (Ministry of Social Services) v. Henson (1989), 35 E.T.R. 192 (Ont. C.A.).

Most of the common-law provinces have permitted the use of this kind of trust without it affecting disability benefits. Alberta was one of the few provinces that doesn’t recognize the use of a Henson Trust.

On June 11, 2018 all that changed when the Alberta legislature passed An Act to Strengthen Financial Security for Persons with Disabilities, which amended the AISH legislation. The provision repeals the portion of the AISH legislation that included an interest in a discretionary trust as an asset. This means a person’s interest in such a trust is specifically excluded in their asset calculation for disability benefits.

Also, there is now a one-year period during which assets that have otherwise been received by gift or inheritance can be invested into a discretionary trust or other exempt asset, such as a registered disability savings plan.

The new act also means that people who were previously ineligible for disability benefits because they were a beneficiary under a discretionary trust are now be eligible.

The Act to Strengthen Financial Security for Persons with Disabilities is a game changer for estate planners who are assisting clients in creating an estate plan involving a disabled beneficiary. Henson trusts may receive life insurance proceeds and provide additional financial benefits for disabled individuals. Life insurance proceeds can be used to create testamentary insurance trusts that are drafted as a Henson Trust.

Testamentary trusts, whether created in a will or by way of a life insurance beneficiary designation with Henson terms, may also be considered as qualified disability trusts, allowing for graduated-rate taxation of the trust.

Now disabled individuals in Alberta who have a Henson trust will have access to provincial disability benefits and services under the provincial disability benefits program, and have any additional care needs met using assets from their trust, which in many instances includes life insurance proceeds.