Estate planning and trusts for a beneficiary with a disability
Some estate lawyers may be more experienced with the intricacies of these types of trusts than others.
Tax planning for a disability trust
A trust you include in your will does not come into existence until you die, but you can establish a trust during your life as well. A trust files an income tax return just like an individual taxpayer. Taxes arise for a trust based on the income it earns. However, the income can be allocated to a beneficiary based on income tax strategy and other practical considerations.
One benefit of a properly drafted trust—that meets the criteria of a qualified disability trust (QDT)—is that it pays tax at graduated tax rates, just like an individual would. Otherwise, a trust may be subject to the top tax rate on all its income.
A trust may be able to allocate a limited amount of income to a beneficiary with a disability without infringing upon government benefits or may be able to allocate tax-free principal.
Not all accountants are well-versed with trust taxation, so tax advice once a trust is active is important.
How to use an RDSP for estate planning?
Another potential tool to consider for your family member is a registered disability savings plan (RDSP), Libbie. Assuming your family member qualifies for the disability tax credit (DTC), they or someone on their behalf can open an RDSP account.
An RDSP is an account that can be invested on a tax deferred basis. It can be opened up until December 31 of the year a beneficiary turns 59. If the beneficiary is 49 or younger, contributions to the account receive additional government grants, and if their income is low, they may also receive government bonds. The grants and bonds can be much higher than the contributions themselves, so this may be very lucrative.
If the family member in your case, Libbie, is a financially dependent child or grandchild, you can even leave your registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) to them upon your death and have some or all of it deposited to their RDSP on a tax-deferred basis. There is a $200,000 lifetime limit for an RDSP account that would apply to previous contributions as well as the allowable tax-deferred transfer from an RRSP or RRIF account.