Special Needs Planning

Presented and created by:

David Yurich, B.Comm., CFP®, RFP, CLUDirector Private Client Group, Senior Investment Advisor

Special Needs Planning

Provide for our communities', sons & daughters with a disability → ”Quality of Life” they are entitled to it now and when we are gone

Protect their entitlement to Ontario Disability Support Program & other Government Programs

Must be certain that the planning that is done, does not infringe on government regulation (s)

Ensure children cannot outlive the benefits they derive from our planning

As parents, want guarantees in place to ensure intentions are met after we are gone

Fairness to Siblings: Common theme not to burden non disabled

children with responsibility of caring for disabled sibling

Parents realize these children either lead or will lead their own lives

Ensure plans are simple & effortless Proper balance between needs of All children

Special Needs Planning

Special Needs PlanningGoals What the disability and caregiver tax credit means to you and your

family Why creating a Henson Trust, via a Testamentary Trust Will is so

important to you and your family How we can use the tax savings to offset the creation of these trusts How we can use the tax savings to offset the long term funding

costs these trusts Explore the reality and importance of long term financial and estate

planning Review the current benefits offered through the Ontario Disability

Support Program Benefits Explore the newly created Registered Disability Savings Plans with

a focus on the available Canada Disability Savings Grant and the Canada Disability Savings Bonds

Disability (DTC) & Care Giver Tax

Credit (CGTC)Copy of DTC in package

– Package contains: Federal DTC Certificate and a list of current Qualified Medical Expenses Tax Credit items

Must be completed by parent and qualified practitioner

What constitutes the qualification for DTC , CGTC

DTC & CGTC…“Why Bother?”

Max DTC transferred from child (2012 tax year) $7546

Additional Supplement $4402 (Child under age 18-offset with child care expenses)

Total possible Tax Credit $11,958 Tax savings range $1,131 - $1,792 (real $$) Retroactive to date of diagnosis - can go back

10yrs or more ($11319 - $17,937)

Source: 2012 Federal Schedule 1 (T1 General)

Care Giver Tax Credit

Children with disabilities possibly grow up to be adults with disabilities

Tax credit $4402 – Income dependent

In addition to DTC

““Medical Expense”Medical Expense”

• Don’t qualify for DTC or CGTC, then claim all Don’t qualify for DTC or CGTC, then claim all associated medical expensesassociated medical expenses

• Claim medical expenses for yourself, spouse or Claim medical expenses for yourself, spouse or common law spouse partner & children born common law spouse partner & children born 1994 or later1994 or later

• List of “Eligible Expenses” in kitList of “Eligible Expenses” in kit

Source: 2012 T1 General Income Tax Guide

Will Kits…Not the answer for families of people with

disabilities

Kits advertised on Radio @ very low cost Advertisements suggest replacing a competent

lawyer to complete Wills by filing out blanks on a questionnaire

Concern → Don’t ask the right questions regarding special needs

We encourage retaining professional legal advice with individuals who specialize in this field

Testamentary Trust Wills & The Henson Trust

What is it???? Trust that arises on death through a Will Creates legal relationship between the Settlor, the

Trustee & the Beneficiary What makes Testamentary Trusts different from

other Trusts is the favorable tax treatment they receive under Income Tax Act (ITA) (at this time)

Pay tax at graduated levels

Terms of Trust can provide for payment of income/capital or both to Beneficiaries

Interest of Beneficiaries can be fixed in the Will

or Discretion to allocate the income and/or capital

among the Beneficiary(ies) can be left to the Trustee

Testamentary Trust Wills & The Henson Trust

Beneficiaries of Trust have interest in Trust Property

Trustee is legal owner of property Trustee has authority to control the management of

the assets Trustee has absolute power over the assets with

discretion to exercise power based on Settlors wishes/intentions

Testamentary Trust Wills & The Henson Trust

Taxation of Testamentary Trust

Trust treated as separate tax payer under ITA Trust files Income Tax Returns to report income,

gains & distributions to Beneficiaries each year Can have a non-calendar year Trust receives deduction from income & gains in a

year for amounts paid to Beneficiaries in that year

Living Trusts “Intervivos” pay tax @ highest Marginal Tax Rate (MTR)

Testamentary Trusts pay tax at a graduated level Ontario combined Federal/Provincial 2013

First $39723 - 20.05% Over $39723 - $43561 24.15%

Over $43561 - $69963 31.15%Over $69963 - $79448 32.98%Over $79448 - $82422 35.39%Over $82422 - $87123 39.41%Over $87123 - $135054 43.41%Over $135054 - $509000 46.41%

Over $509000 49.53%Source: http://www.taxtips.ca/taxrates/on.htm

Taxation of Testamentary Trust

Tax payable in province of residence of Trust or where majority of Trustees reside

Incomes maintains its character (interest, dividends, capital gains) when paid out to Beneficiaries

Taxation of Testamentary Trust

Access to graduated rates, more beneficial to retain income & gains and have Trust pay tax versus Beneficiary (at this time)

Trustee can elect to have income & gains taxed in Trust even if paid or payable to Beneficiary

Portfolio of Investments of $750,000 @ 8% per year or $60,000 in income saves $8,500 in taxes each year

Taxation of Testamentary Trust

Why consider a Testamentary Trust?

When a spouse has enough assets in his/her name to permit other spouse assets to be held in trust to save tax

Children/grandchildren have enough assets who want to save tax

Protect assets widow/widower’s new suitor or children spouse’s on marital breakdown

Protect spendthrift or disabled child/children

Ontario Disability Support Program (ODSP)

Operated by Ontario Ministry of Community & Social Services

Designed to meet unique needs of people with disabilities who are in financial need or who want & are able to work and need support

ODSP provides income support to help pay for living expenses (like food & housing)

Benefits available: Drug/dental coverage, vision care, hearing aids, diabetic supplies Help with transportation costs to medical appointments Help with work related expenses, child care costs & items needed for

work If qualify → May also receive special diet allowance to offset costs of

casein, gluten, soy or sugar free diet

Ontario Disability Support Program (ODSP)

To Qualify:● 18 yrs of age or older-payable to 65 (if needed) then

CPP, OAS & GIS takes over● Ontario resident● In financial need● Have substantial physical or mental disability that:

● is expected to last a year or more● makes it hard for you to care for yourself, take part in

community life or work● ODSP will look at:

● Financial situation ( assets, income, housing costs, size of family)

● Disability status

Ontario Disability Support Program (ODSP) Rate Chart-November 2012

Source: http://www.mcss.gov.on.ca/en/mcss/programs/social/directives/directives/ODSPDirectives/income_support/6_1_ODSP_ISDirectives.aspx

Basic Needs TableNumber of

dependants other than a

spouse

Dependants over 18 years

Dependants 13 -17 years

Dependants 0-12 years

Recipient (See Note 1

below)

Recipient and Spouse (See Note 2

below)

Recipient and Spouse (See Note 3

below)0 0 0 0 $596 $882 $1,189

10 0 1 739 882 1,1890 1 0 757 900 1,2071 0 0 951 1,063 1,370

2

0 0 2 739 882 1,1890 1 1 757 900 1,2070 2 0 775 918 1,2251 0 1 951 1,063 1,3701 1 0 969 1,081 1,3882 0 0 1,133 1,264 1,571

For each additional dependant, add $202 if the dependant is 18 years of age or older, or $18 if the dependant is 13-17 years of age, or $0 if the dependant is 0-12 years of age.

ODSP & Inheritances

Family members if left an inheritance who are receiving ODSP benefits will not be eligible for ODSP benefits

ODSP considers inheritance as a gift Exemptions:

- up to $6,000 of total value of all gifts is exempt from income (in any 12 month period without affecting ODSP Income Support)- $6,000 limit does not always count as income-when used to pay for disability related items or services

- ODSP must approve item or service in advance to be exempt

Source: http://www.mcss.gov.on.ca/en/mcss/programs/social/odsp/income_support/odsp_inherit.aspx

ODSP & Inheritances…

Example Inherit $ in August ODSP will consider it

when calculating income support for August If $ left over in next month- (Sept.) ODSP

will treat it as an asset in that month & asset rules will apply that can affect eligibility for income support

Inheritances up to $100,000 will not count as an asset if it is placed in a Trust

Trust must be setup according to ODSP rules or ODSP benefits could be affected

If inheritance more than $100,000 can still continue benefits if placed within Discretionary Henson Trust

Setup through Will & gives Trustee power to decide when to pay & how much money to pay Beneficiary of the Trust

ODSP & Inheritances…

ODSP & Henson Trust

History of Henson Trusts Real solution to inequity is Henson Trust Available in Ontario since 1989 Henson trust places estate assets in the care &

control of a trustee to be administered for the benefit of a Beneficiary(s)

Inheritances placed in a properly prepared absolute discretionary trust (Henson Trust) are not the asset of the child & will not affect provincial benefits

“Discretionary Trust”, “Henson Trust” & “Absolute Discretionary trust” often used interchangeably

Motivation for Parents & Guardians to set up a

Henson Trust

Special beneficiaries often benefit from guidance in handling large sums of money or significant assets

Either temporarily or on L.T. basis Some beneficiaries are unable or unwilling to

seek guidance May at some point be left without care unless

special provisions put in place

Henson Trusts

Must be created during a parent’s or guardian’s lifetime (Intervivos)

and To the terms of a

parent’s or guardian’s will (testamentary)

These Trusts are invaluable in planning for child’s care when Parent/Guardian no longer there

Benefits of Henson Trust

No lifetime limit to the exempt amount of assets that can be held in a Henson Trust

In contrast- there is $100,000 lifetime limit to a non Henson Trust, (any Trust where the Trustee does not have absolute discretion)

The Bottom Line

Henson trusts, ODSP, Benefits & Tax Credits are special arrangements necessary to properly ensure that Loved Ones are given the extra care they deserve & that inheritances will not be wasted

Options for Funding of Henson Trust

Savings: The establishment of a regular savings program may be able to provide adequate funds to Henson Trust

Parent’s Estate: Provided that the parent’s estate is sufficiently large, it could provide for their own needs in their elder years, as well as having enough left over to fund the trust

Family members: siblings, aunts and uncle’s, grandparents could be willing and able to provide money to fund the trust

Life insurance: For the average family, life insurance may be the only way that they can leave a large sum to the trust by making small monthly payments. It is also possibly the only way of funding a trust that is guaranteed. The other resources mentioned above may not always be available but a paid-up life insurance policy can guarantee future funds

Registered Disability Savings Plan (RDSP)

Savings plan intended to help parents & others save for long term financial security of person who is eligible for DTC

Contributions non tax deductibleMade until end of the year that Beneficiary

turns 59 years

RDSP…

Withdrawals of contributions are not included as income for the Beneficiary

However, Canada Disability Savings Grant, Canada Disability Savings Bond & investment income earned in the plan are included in Beneficiary’s income for tax purposes when paid out of RDSP

RDSP…

Who can become a Beneficiary?

One must be: Eligible for Disability

amount Valid SIN Resident of Canada @

time plan is entered into

Under age 60

RDSP…

Who can set up an RDSP?

Legal parent of Beneficiary Guardian, tutor or curator of the

Beneficiary Individual who is legally

authorized to act on behalf of Beneficiary

Public department, agency, institution that is legally authorized to act on behalf of Beneficiary

RDSP…

When plan is opened by a Beneficiary’s legal parent’s, the legal parents may continue as holder(s) of the plan after Beneficiary reaches age of majority

When Beneficiary becomes an adult, he/she may be added as joint holder

RDSP…

In all other cases, the Beneficiary is the only one who can be a plan holder once they have reached age of majority & are contractually competent

If a plan is opened by somebody other than the Beneficiary, or Beneficiary’s legal parents, that person or body must be removed as a holder of the plan when Beneficiary reaches age of majority

RDSP…

An individual who is eligible to be Beneficiary of an RDSP, may have reached age of majority but may not be competent to enter into a contract

If so: qualified person may open RDSP for individual and become holder

Qualified Person are: -guardian, tutor, curator of Beneficiary, or person legally authorized to act for Beneficiary-public department, agency, institution that is legally authorized to act for beneficiary

Tutor or Curator: legally appointed individual either by will or by POA

RDSP…

Holder who is not Beneficiary of plan does not have to be resident of Canada but must have valid SIN or BIN (business identification number) in order to establish plan

How Do You Establish an RDSP?

Person who is qualified to be a holder of the plan must contact a participating financial institution that offers RDSP’s (can invest in GIC’s, mutual funds, savings deposits etc.)

Note: Beneficiary can have only one RDSP at any given time, although this plan may have several plan holders throughout it’s existence

Plan holder is the person who establishes the RDSP & makes contributions on behalf of the Beneficiary

RDSP Limits

No annual limitLifetime limit of $200,000

Canada Disability Savings Grants

Government will pay matching grants of 300%, 200% or 100%, depending on family income & amount contributed

RDSP can receive maximum of $3,500 in matching grants, in a year

Maximum grant of $70,000 in Beneficiary’s lifetime

Source: http://www.clwindsor.org/resources/financial-matters/rdsp

Grant can be paid to an RDSP on contributions made to Beneficiary’s RDSP by Dec 31st of yr Beneficiary turns 49 yrs old

When annual net family income is less than $85414 the grant will contribute:

- $3 for every $1 contributed on first $500

- $2 for every $1 contributed on next $1,000

(a $1,500 deposit will attract maximum grant of $3,500) When annual net family income is over $85414 the grant

will contribute $1 for every $1 contributed up to $1,000

Source: http://www.clwindsor.org/resources/financial-matters/rdsp

Canada Disability Savings Grants…

Government will pay income tested bonds of up to $1,000 a year to low income Canadians with disabilities regardless of amount contributed

Lifetime bond limit is $20,000 Bond can be paid to RDSP until year in which Beneficiary

turns 49 When annual net family income is $24863 or less the

government will provide $1,000 per year without any contributions, between $24863 and $42707, bond is prorated, over $42707, no bond is paid

Bond & grant must stay in plan for 10 years otherwise must be repaid

Source: http://www.clwindsor.org/resources/financial-matters/rdsp

Canada Disability Savings Bond

Payments Made From RDSP

Only certain payments can be made from

an RDSP

Payments to Beneficiary referred to as Lifetime Disability Assistance Payments (LDAP), or Disability Assistance Payments (DAP)

Payments to Beneficiary’s estate follow death of Beneficiary

Repayment of grants & bonds to the government

Lifetime Disability Assistance Payments (LDAP)

Once started must be paid at least annually until either the plan is terminated or Beneficiary has died

Begin by end of year in which Beneficiary turns 60

Subject to annual maximum withdrawals limit based on Beneficiaries' life expectancy & fair market value of plan

Disability Assistance Payments (DAP)

Beneficiary can request withdrawal from RDSP between ages 27-59 years

DAP is considered “financial hardship” payment

Maximum withdrawal based on formula

Then Beneficiary of

plan will be entitled to request & receive DAP from the plan

RDSP Payments & Income Tax

CDS grant, bond & investment income are included in Beneficiary Income for tax purposes when paid out of the RDSP

RDSP issuers report the taxable portion of the payments from the plan in box 78 of T4A slip

RDSP-What happens when impairment no longer exists?

RDSP must close no later than the end of calendar year following the first full calendar year that the Beneficiary is no longer considered mentally or physically impaired

Grant, Bond and Investment earnings are taxable, contributions are tax free

Similar tax treatment occurs at death

RDSP & Provincial Disability Benefits

BC, Alberta, Saskatchewan, Manitoba, Ontario, Newfoundland, Labrador & Yukon have all exempted the RDSP as an asset & income when determining a person’s eligibility for Provincial Disability Benefits

New for 2011, Past Grants

Eligible to claim past unclaimed grants for preceding 10 years (2008 inception date)

To be eligible, must still qualify for DTC and be appropriate age in each preceding year

Past grants paid to annual max $10500 Unused past grants carry forward future years

New 2011 Past Bonds

Eligible to claim past unclaimed bonds for preceding 10 years (2008 inception date)

To be eligible, must still qualify for DTC and be appropriate age in each preceding year

Depends on contribution amount, beneficiary/family net income

Past bonds paid to annual max $11000 Unused past bonds carry forward future years

Thank You!

For more information / free consultation

705 522 1422/1 800 837 1670

Email: dave@soundfs.ca

This presentation was prepared by David Yurich, who is a registered Financial Advisor with Dundee Private Investors Inc., a DundeeWealth Inc. Company. This is not an official publication of Dundee Private Investors Inc. The views (including any recommendations) expressed in this presentation are those of the author alone, and they have not been approved by, and are not necessarily those of, Dundee Private Investors Inc.