I was recently referred to a family to assist with their financial planning. Their mom had just passed away and left a Henson Trust in her Will for one of the daughters who is physically disabled. Although mom left detailed notes, they didn’t know what to do or where to start.
I must give kudos to the mother who did a lot of research and planning for her daughters. She had an RDSP set up for the one girl, life insurance policies that would provide them each with funds, investments and a properly structured Will to create a Henson Trust.
She had beneficiary designations set up for her investments and life insurance policies with the disabled girl's portion going directly to the Henson Trust, bypassing probate. Fabulous!
But, one important planning strategy was not taken into consideration …
When you pass away with Registered assets (RRSP or RRIF) and there is not a spouse to transfer these funds to, the full amount of the investment value becomes 100% taxable and must be declared as income on the deceased’s final tax return.
If, however, you have a financially dependent, disabled child, these assets can be transferred directly into an RDSP account (up to the maximum allowed for RDSP contributions). These funds would therefore NOT have to be declared as income on the final return.
By using this strategy, the family could have saved $50,000 in taxes. Mom had approximately $200,000 remaining in a RRIF. This puts her into the 53.53% tax bracket in Ontario, with more than $107,000 going to the government in taxes. If she had directed 50% to each child, but ran the disabled daughter’s portion through the estate and into the RDSP to utilize this rollover provision, she would have reduced that taxation by more than $50,000. Instead, she had it go into the Henson Trust directly, which bypassed probate and saved the estate approximately $1,500.
Proper planning is essential!
I am happy to be able to assist these lovely young ladies in the settlement of their mom’s affairs, help them to understand their unique situation, coordinate & manage the Trust assets, and to effectively structure their own financial situation for their future. I just wish they had that extra $50,000 in their pocket rather than the government's.
By Karen Roy, Spectrum Financial Strategies Inc.
December 23, 2022
