Category: Planning for the Future

Putting it all together.

You have been presented with lot of information over the past couple of months regarding future planning for your disabled child. Today I am going to simplify everything down to a few important points.

Assuming your child is a minor and still years away from adulthood, there are just a few things that you need to do now. You should:

• Have a will constructed by a lawyer who understands disability issues. Take the Wills and Trusts seminar from PLAN prior to consulting the lawyer. Do not use a cheap wills kit. You need to have a lawyer involved because of the disability issues.
• Apply for the Disability Tax Credit Certificate.
• Open an RDSP. This one is a no-brainer. There is no disabled child that will not benefit from this generous government program.

There are a few other issues that can wait until your child is a teenager, at which time you need to start planning for their financial future. This includes:

• Filing an income tax return on behalf of your child. Family income from 2 years prior is used for assessing the government bonds and grants for the RDSP. This means that beneficiaries will have to file tax returns beginning the year they reach age 17 if they wish to receive the maximum grant and bond in the year they reach age 19.
• Educating yourself regarding discretionary trusts. If such a trust makes sense for your family, you need to see a lawyer to have it set up.

I have touched briefly on some of the financial issues dealing with transition to adulthood. There are numerous resources which will go into much greater detail about savings vehicles such as RDSPs and discretionary trusts. My personal favorite is PLAN. They have books, on line learning, and in-person seminars. PLAN has published a book entitled “Safe and Secure” which I highly recommend. You can pick it up for free at any London Drugs store in BC.

This has been a very brief and simple overview of some of the ways you can plan for a secure financial future for your disabled child. The primary message that I wanted to convey was that families of any financial means can plan for the future of their children.

A trust is an arrangement whereby a person (the “trustee”) holds the money for the exclusive use or benefit of another (the “beneficiary”). You may have heard about trusts that the more affluent set up for their children. The trusts that we are talking today about are somewhat different in the sense that they are discretionary trusts for the benefit of a person with a disability.

The key point is that these trusts are discretionary (in legal terms they are called “absolute discretionary trusts”) in that the trustee has absolute discretion in the disbursement of funds from the trust for the benefit of the beneficiary.

Courts in Canada have determined that money held in a discretionary trust (also called a “Henson Trust” or a “Supplemental Needs Trust”) for a person with a disability does not affect the person’s ability to receive their Disability Assistance. In BC, if the funds from the trust are used to cover “disability related expenses”, without being given to the beneficiary as cash, they will have no impact on the beneficiary’s continued receipt of Disability Assistance without the PWD clawback that I referred to in previous posts.

Trusts can be complicated and need to be constructed by a lawyer who specializes in this field. It should also be accomplished in conjunction with writing your will. Before rushing off to the lawyer’s office, I recommend that you take the PLAN – Wills and Trusts seminar (on-line or in person) to work through your personal details. Part of the course involves filling out a worksheet which is invaluable when you finally meet the lawyer to setup the trust.

Discretionary trusts are a valuable tool for high income households to plan for special needs individuals who are unable to manage their finances and at the same time maximize the PWD benefits.

Does every special needs person need a trust? Absolutely not! In the past, a discretionary trust was the only way to supplement the income of a person in receipt of Disability Assistance. Now we have the RDSP which is much easier to manage and more accessible to those of more modest incomes. The primary limitation of an RDSP is the $200,000 maximum lifetime contribution limit, but with proper planning this may be more than enough. Having said that, the optimal solution is to have both a discretionary trust and an RDSP. The withdrawal rules are different for each of them and a trustee can use those rules to maximize the financial benefit to the beneficiary.

An outstanding guide to trusts can be found on The Voice of the Cerebral Palsied of Greater Vancouver.

The role of the trustee is a demanding one and perhaps more than could reasonably be expected of most people. You may want to consider The Coast Financial Trust Program. They will assist you in setting up and administering the trust. Given the difficult task, the fees are quite reasonable.

A rollover of funds from an RRSP to an RDSP is another option for estate planning although there are a few limitations that you need to be aware of.

Firstly, a rollover is an indirect tax-deferred transfer of certain amounts to an RDSP beneficiary’s plan. Rollover amounts must originate from a Registered Retirement Savings Plan, Registered Retirement Income Fund, or Registered Pension Plan of an RDSP beneficiary’s parent or grandparent. Such amounts may only be rolled over if the RDSP beneficiary was financially dependent upon the parent or grandparent at the time of the parent or grandparent’s death because of a mental or physical infirmity.

Here are some reasons why it makes sense:

• If funds from an RRSP are willed directly into the hands of the beneficiary, the funds are first subject to full taxation before being passed on.
• A direct transfer of funds will trigger a Persons with Disability (PWD) clawback effectively nullifying the transfer.
• A rollover to an RDSP is much easier to administer than a discretionary trust.
• The rollover funds are transferred without triggering taxation. Inside the RDSP, the funds continue to accumulate tax free until funds are withdrawn at which time they are subject to taxation in the hands of the beneficiary.
• In the case of a grandparent this can be an effective way to pass on funds in a tax efficient manner without affecting the individuals Disability Assistance payments.

There are a few limitations that you need to be aware of:

• A rollover is subject to the maximum $200,000 lifetime contribution limit to an RDSP.
• A rollover will not attract a Canada Disability Savings Grant.
• Once the plan has received the maximum contribution limit, no further Canada Savings Grants are possible.

Those of you that have opened an RESP for your child and are now wondering if he/she will ever attend post secondary education may be interested in the following change:

• Effective 2013 any investment income earned in the RESP may be transferred on a tax-deferred basis to an RDSP.

To qualify for the tax-free rollover the beneficiary must meet one of the following conditions:

• The beneficiary has a severe and prolonged mental impairment that can reasonably be expected to prevent the beneficiary from pursuing post-secondary education;
• The RESP has been in existence for at least 10 years and each beneficiary is at least 21 years of age and is not pursuing post-secondary education; or
• The RESP has been in existence for more than 35 years.

How are the funds taxed as a result of the rollover?

• When an RESP rollover occurs, contributions in the RESP will be returned to the RESP subscriber (parent or grandparent) on a tax-free basis. As well, Canada education savings grants and Canada learning bonds in the RESP will be required to be repaid to the government. The investment income will be transferred tax free to the RDSP.

If you have set up an RESP and are considering closing it, there is no longer a rush to make a decision. Any income derived from the account can now be used for the child’s benefit in the RDSP.

Refer to the Budget 2012 Registered Disability Savings Plan (RDSP) for more detailed information.

When the Registered Disability Savings Plan (RDSP) was first introduced, the matching government grants were only given for contributions in that calendar year. That meant that if you missed the Dec 31 deadline, you were out of luck for that year.

Things have now changed. Since 2011, you are now allowed to carry forward unused grant and bond entitlements to future years. The carry forward period can only start after 2007 and lasts for 10 years. Considering the age of your child and the number of years since the disability commenced this can be a significant amount of money. The government will contribute up to $3,500 per year in grants and up to $1,000 in bonds. Refer to my page RDSP for more details.

For those of you who haven’t yet started an RDSP, there is a lot of money on the table and now is the perfect time to set up the account and collect all the government grants and bonds back-dated to 2008. Remember that the child must qualify for the Disability Tax Credit in order to open an RDSP.

A word of caution; don’t use this as an excuse to put off contributions to the RDSP. Firstly you never know when or if the government might change the rules and secondly the earlier you start the more time you have to compound your returns.

If you have not yet educated yourself about the RDSP, please refer to my page RDSP or go to RDSP.com for a more detailed look at the plan.

In my conversations with parents, I have found that disappointingly few parents have opened a Registered Disability Saving Plan (RDSP) for their disabled children. This is troubling because RDSPs are easy to setup and the government is eager to throw free money into the account.

Some of the reasons include:

• Ignorance of the existence of RDSPs
• The mistaken belief that withdrawals from an RDSP will affect the Persons with Disability (PWD) Benefit when their children become adults (Not true in BC)
• The idea that RDSPs are complicated to setup and manage (again not true)
• Some people believe that withdrawals from the RDSP are taxable (Partly true; Contributions are tax free on withdrawal and only the accumulated income and government grants/bonds are taxable). The important thing is that it will be taxed in the hands of the beneficiary, and therefore more likely to receive significantly lower taxation.

An RDSP is an outstanding savings vehicle for your disabled child no matter what your income level. The province of BC has sweetened the pot by exempting RDSP withdrawals from the PWD clawback. The federal government is ready to contribute up to $3,500 per year in grants and up to $1,000 in bonds. In the case of the Disability bond, no contribution is required to receive this amount for low income families.

The RDSP is more than just a long term savings plan. It should also be a key element of your estate planning.

In case you are dismissing the RDSP as irrelevant, please consider two samples scenarios.

Firstly for a low income family opening an RDSP when their child is 4 years old and never contributing a single penny, the account could be worth $239,000 by the time their child is 60 years old!

Consider a middle income family ($37,000 to $85,000) contributing $1,500 per year for 20 years. By the time the individual is 60 years old, the account could be worth $1,300,000!

We are talking about serious money here. The RDSP.com website has an interesting calculator that you can use to see how your contributions and the government funds accumulate tax free to a sizable amount. It’s worth putting in your personal numbers to see what an RDSP can do for your child. Remember the earlier you start, the more time you have for the gains to accumulate.

It’s important to remember that the RDSP is a long term savings plan and will do very little for your short terms needs. There is a rule called the 10 year hold-back. It was slightly modified last year, but the basic idea is that if you take money out of the account within 10 years of receiving a grant or bond, the government will claw their contributions back. Just think of the plan as a long term investment for your child and you will be fine.

For more information regarding the RDSP refer to my page RDSP or for a more detailed source refer to RDSP.com.

In the last few posts I talked about the necessity of having a will. Before you go running off to the lawyer’s office to get your will made up, there are several questions that need to answered first. Some of these include:

• Who do you want to be the guardian of your children?
• Who is the backup guardian?
• Who will be the executor of your will?
• Do you want to have a trust for your child?
• Who will be the trustee?
• Have you discussed with these people the roles you want them to assume?
• Do you have the full names, addresses and contact information for these people?
• Who is the beneficiary of your RRSPs?
• What assets do you have and are they jointly held?
• Have you set up an RDSP for your child and do you want to rollover your RRSP into this account?
• Have you considered the Persons with Disabilities (PWD) clawback?

These are just a few of the questions that need answered before you see a lawyer. PLAN has an excellent wills and trusts course that you should take before drawing up a will. It includes a detailed worksheet that you will fill out as you answer these and many other questions. You can then bring this along to the lawyer’s office and this will greatly speed up the process.

A will can be as simple or as complicated as you want. For those with modest assets you may just need to set up an RDSP for your child and then name an executor and guardian for your child. If you want to setup a trust (more on this in a future post), you need to see a lawyer who specializes in this area. Contact PLAN for a list of lawyers who can assist you.

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.

Today I will begin with the basic will. A significant majority of families in the autism community have not prepared a will.

Why not? Perhaps;

• Life is overwhelming and we are just having problems getting through the day
• Naming a guardian for our children is too difficult when a child with autism is involved
• A will is something for the future when we are old and grey
• If we die, doesn’t our money just go to the kid’s anyway?

Before we have a look at what happens to your children if you and your spouse die without a will in place, it’s important to talk about one of the benefits your child may qualify for as an adult. A disabled single adult in B.C. may qualify for a “Persons With Disabilities” (PWD) pension. This could be as much as $906 per month. Importantly this amount will be clawed back if the individual has assets (with certain exclusions) in excess of $3,000 (soon to be $5,000). CLBC is in such a mess at the moment that children transitioning to adulthood are being told the cupboard is bare. The PWD benefit is vitally important and must be protected.

Firstly, following the death of you and your spouse, assuming there is no will in force, your children become wards of the state. MCFD will assume guardianship and look after the child’s health, education and upbringing . A relative or other appropriate person may apply to court for guardianship or to adopt the child. The children may or may not be placed with family members. You may not have a perfect guardian for your kids, but I guarantee that you have at least one relative that you would never want as a guardian. Do you want the courts making this decision or do you want to make this one yourself? Without a will in place, the courts will be making this important decision.

After your death your assets become part of your estate and without a will they will be generally be shared among your spouse and children. If a will does not appoint a guardian for a child under nineteen and there is no surviving parent with legal custody of the child, the Public Guardian and Trustee will manage the child’s legal and financial interests. The child’s guardian would have to apply to the Public Guardian and Trustee for any money needed for things like living expenses or education. Any assets passed on to your child when he/she turns 19 will be their property and will then be subject to the PWD clawback. The net result is that you will have given them nothing. Is that really what you want?

The next post will deal with extended family and how they can help out financially.

Today I’m bringing to you the first in a series of posts about estate planning and long term savings for your special needs child.

We all worry about our kids and wonder what will happen to them as adults. CLBC is a complete mess at the moment and offers very little to a disabled child transitioning to adulthood. There exists a bare bones disability benefit known as the “Persons with Disabilities” or PWD benefit, but at about $900 per month this doesn’t make for an existence with any luxuries.

It was not that long ago that estate planning for special needs individuals was something for the rich and well connected. Trusts were the financial vehicle of choice although they were out of reach of many families in low to mid income levels. Things are different now.

One of the most dramatic changes in the last few years was the introduction of the RDSP. For the first time there is now a savings vehicle that is biased in favour of those families with modest incomes. Please do not dismiss the RDSP as another minor government program. The long term savings are nothing short of amazing, especially for those with lower incomes.

Adulthood may be years away for your child, but now is the time to start laying the financial groundwork for that time. Some of the topics that I will covering in future posts include:

• Wills
• RDSPs
• RESPs
• RRSPs
• Trusts

To construct a plan for your child’s future you need to have a basic understanding of each of the above topics and over the next couple of months I introduce you to each of them in turn.

I hope these are not topics that fill you with dread, but rather to give you some hope, no matter how stressful your present financial circumstances are. I will try to show you that with a little foresight everyone can plan for a good financial future for their special needs child.