Grandparents and other extended family members often try to help their disabled grandkids by leaving them money in their wills. As noble as this is, it may be the worst possible thing to do. As I have mentioned in previous posts, Persons with Disability (PWD) benefits for a disabled adult are clawed back until assets (with some exclusions) are reduced to $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 claw back.
- The money can be willed to contribute directly to a Registered Disability Savings Plan (RDSP) for the child. Distributions from an RDSP are exempt from the PWD claw back. 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 has a considerable amount of money for the child, perhaps a trust is in order. To set up a trust (which is exempt from the PWD claw back 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 in a tax efficient manner
- The proceeds of the RDSP are exempt from the PWD clawback
- It ensures that the money will be used for the benefit of the child and no one else
- 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 having the government claw back the entire amount. If your child’s grandparents want to contribute to his/her future in a meaningful way you need to have this talk with them (you might also send them a link to this post).