Protecting an Inheritance with the Registered Disability Savings Plan?

I was asked recently whether an inheritance could be placed directly into a Registered Disability Savings Plan ("RDSP") so as to protect those funds from the Department of Community Services. As an aside, if you're somehow not already familiar with the RDSP, you really need to be.  

As long-time readers will know, when calculating an individual's [continuing] financial eligibility to benefits under the Disability Support Program ("DSP") the Department of Community Services ("DCS") looks at both the individual's monthly income and their assets. With some specified exceptions, the Department considers any property owned by a person regarded as having value and available to meet debts and commitments as an asset.

For our purposes, there are four main ways of transferring property or money to a beneficiary under a Will. The executor will be directed to 

• transfer the bequest directly to the named individual;
• hold the funds in the type of discretionary trust used whenever a minor child is a beneficiary;
• hold the funds an absolute discretion trust [better known as a "Henson trust"] or
• direct that the funds be placed in an identified RDSP for the benefit of the beneficiary.**

Unfortunately, only two of the above will protect an asset like an inheritance from being taken into account by under the DSP. Neither a direct transfer nor the creation of the typical and well-used discretionary trust bodes well financially for any beneficiary who is [or will be] eligible for support under the DSP, as both will result in the funds being taken into account and negatively affect the beneficiary's current (and most likely) future benefits. Unfortunately, the more significant the the inheritance, the greater that negative effect will be.  

The key to protecting any inheritance from DCS is to ensure that, from a legal point of view, the funds are never placed in the hands of the beneficiary, meaning the beneficiary has no legal right, either themselves or through an agent, to access those funds, something that both a Henson Trust and a RDSP can do IF the Will is properly worded. 

The Henson Trust                                                                                                                            I am a huge proponent of the Henson Trust in such a situation as it's the safest and most effective way to make sure that the inheritance is protected from the DCS while maintaining quick and easy access to the funds for the benefit of the beneficiary. As discussed many times over the life of this blawg, this is hands down the best way to handle an inheritance for a person who is or will be receiving government benefits. 

AS AN ASIDE, PLEASE NOTE THAT A HENSON TRUST DOES NOT INVOLVE THE CREATION OF A DOCUMENT SEPARATE FROM THE WILL ITSELF, BUT IS VALIDLY CREATED THROUGH THE USE OF PARTICULAR WORDING IN THE CLAUSE OF THE WILL THAT PROVIDES FOR THE BENEFICIARY'S BEQUEST. 

The RDSP                                                                                                                                           As  the law provides that any funds held in a RDSP will not be considered as either income or an asset when calculating government benefits, if the Will places the funds DIRECTLY in a RDSP that has already been set up for the individual's benefit, access to to the DSP will not be affected. 

If [and only IF] the funds go directly from the estate to the RDSP, from a legal point of view, they were never under the beneficiary's control, meaning the beneficiary never had any legal right to access the funds. 

However, this requires that either the beneficiary or someone acting on their behalf has created a RDSP prior to the Will being executed so that the identifying details of that RDSP can be set out in the Will and that RDSP still be in existence when the funds are to be transferred (after the testator's death).

But What If ...                                                                                                                                       In those situations where it's too late for the testator to direct that the funds be held in a Henson Trust or deposited in a RDSP (meaning after their death), the situation becomes a little stickier. There is no doubt that initially, at least, DCS would take the view that an inheritance that was directly transferred to  the beneficiary (or their parent, guardian or Representative  appointed pursuant to the Adult Capacity and Decision-Making Act, depending on the situation) cannot be protected by placing it in a RDSP. However, the situation is far from crystal clear.

We know that the legal test is whether the beneficiary receiving government assistance has any right to legally access the funds once they have been placed in a RDSP; however, this is not necessarily as cut and dry as we might like. It all depends on the situation. That answer comes those details will need to be the topic of a separate blawg post. 

Did you honestly expect a simple response to a simple question when the answer lies in that place no one ever truly wants to go ... the place where disability law and the CRA collide? 

In all honesty, I suppose I could have responded with the standard "It depends" answer, which while legally correct tends to make the listener roll their eyes and walk away thinking nasty thoughts about lawyers. And we certainly don't want to go there, do we? Not I.

** Please note that, disability or not, if the term "trust" does not appear in the clause setting out the bequest, irrespective of disability or age, the inheritance will be considered  transferred directly to the beneficiary provided they are 19 or older, the parent or guardian if the beneficiary is a minor, or a legal Representative. In either of the last two situations, the law imposes a trust relationship upon the recipient, meaning that person holds those funds in trust for the benefit of the named beneficiary. Unfortunately, it's not the type of trust that will protect those funds from DCS.