Grandparents and other extended family members often try to help their disabled grandchildren by leaving money in their wills. As noble as this is, it may be the worst possible thing to do. As we read in the previous post, Persons with Disability (PWD) benefits are clawed back until assets (with some exclusions) are clawed back to $3,000 (soon to be $5,000). The net result is that the child will have received nothing. This is not a satisfactory situation to say the least. The good news is that with a little planning we can achieve a very different result.
Some solutions include:
- Grandparents leaving the money directly to the child’s parents so they can distribute the money in a fashion which will not trigger the PWD clawback.
- The money can be willed to contribute directly to an RDSP for the child. Distributions from an RDSP are exempt from the PWD clawback. One downside is that there is a lifetime maximum contribution limit of $200,000. Additionally, if all the money is contributed in a lump sum, the plan will only receive the matching government grants for that year.
- If the grandparents estate is planning to leave a considerable amount of money to the child, perhaps a trust is in order. To set up a trust (which is exempt from the PWD clawback if constructed properly) a lawyer specializing in trusts should be consulted. A starting point would be to contact PLAN to learn about wills and trusts and get their recommendation for a lawyer.
My personal recommendation (especially for those of us with modest incomes) is for the Grandparents to contribute to the child’s RDSP on a yearly basis while they are still alive. Doing this will ensure that:
- The government grants and bonds are maximized
- The money is passed to the child is a tax efficient manner
- The proceeds of the RDSP are exempt from the PWD clawback
- Unlike a trust, an RDSP is very easy to set up and manage. Please refer to RDSP.com for more detailed information.
Below I have given an example of how it might work for a Grandparent contributing to an RDSP.
- Assuming the family income is below approximately $85,000 and above $42,000
- The child is 4 years when contributions commence
- The Grandparents contribute $1,500 per year for 20 years for a total contribution of $30,000
- The funds are invested in a conservative manner earning 5.5% per year
- The net result is that when the child is 55 years old the account will be worth approximately $1,000,000!
That sounds like a much better result than the opening paragraph. If your child’s grandparents want to contribute to his/her future in a meaningful way you need to have this talk with them.