This is a brief overview to help Ontario, Canada, families and parents understand a specific type of legal protection for individuals with disabilities. Typically, Henson Trusts are designed for long-term financial protection.
Important Note: Henson Trusts are generally not available when a beneficiary is entitled to receive funds from a lawsuit (whether structured or not), as a beneficiary cannot set up a Henson Trust for themselves. Instead, these trusts are most often used in Wills to shield an inheritance or are established by a loved one during their lifetime to gift money to a disabled beneficiary.
Trusts can provide immense benefits if properly established. Because they are legally complex and intended to last a lifetime, it is essential to consult with legal counsel and an accountant who are familiar with this particular type of legal entity.
A Henson Trust is a fully discretionary trust set up for a person with a disability. Its core purpose is to allow the individual to receive government disability benefits (such as ODSP or AISH) while allowing funds from other sources—like inheritances—to be used to improve their quality of life.
The “magic word” here is discretionary.
North American Jurisdictions and Similar Protections
While the term “Henson Trust” originates from Canadian case law, it is important to note that most jurisdictions across North America offer similar mechanisms or court protections designed to safeguard disabled individuals without jeopardizing their state or provincial benefits. Because every province and state operates under its own distinct legal and regulatory framework, these vehicles are described differently depending on where they are established. For example, in the United States, families utilize a Special Needs Trust (SNT)—which can be further categorized as Third-Party or First-Party (Supplemental) Trusts—to achieve the exact same shielding effect for programs like Medicaid and Supplemental Security Income (SSI). Regardless of the specific regional terminology or localized statutory requirements, the underlying legal philosophy remains identical across North America: separating legal ownership from enjoyment to protect vulnerable individuals and preserve their access to essential government support networks.
How a Henson Trust Protects Funds
1. The beneficiary does not “own” the money
The beneficiary has no legal right to demand payments.
They cannot collapse the trust.
They cannot assign or pledge the assets.
Because of this:
The assets are not legally considered the beneficiary’s assets.
Government programs do not count the trust as personal wealth.
Result: Disability benefits are preserved.
2. The Trustee controls everything
The Trustee decides if, when, and how much money is paid out, as well as what it is used for. Payments are usually made for the person, rather than to the person (e.g., paying directly for rent, therapy, travel, or equipment).
This approach generally prevents payments from being treated as income or assets under benefit rules. However, please note that ODSP has specific rules regarding how much can be paid out in a 12-month period if the payment is not for an approved disability-related item or service. For example, “voluntary payments” are currently capped at $10,000 per 12-month period. If a Trustee overlooks this limit, the excess could be treated as income, potentially impacting benefits.
3. Creditor Protection
Because the beneficiary has no enforceable right to the funds:
Creditors of the beneficiary cannot seize trust assets.
Divorce settlements generally cannot touch the trust (assuming it is properly drafted and administered).
Are Henson Trust funds taxable?
Short answer: Yes—but not in the way most people fear. It depends on where the income is taxed, not whether it is taxed.
Tax Treatment — Step by Step:
1. Inside the Trust: The trust is its own taxpayer. Investment income (interest, dividends, capital gains) is taxable. If income stays in the trust, it is usually taxed at the top marginal trust rate (unless it is a QDT—see below).
2. When Money is Paid Out:
Capital Distributions: These are not taxable. This is the original “principal” put into the trust.
Income Distributions: These are taxable, but they are taxed in the beneficiary’s hands. This is often at a much lower rate due to the Disability Tax Credit and the individual’s lower personal income. The trust receives a deduction for income it distributes, avoiding double taxation.
Special Advantage: Qualified Disability Trust (QDT)
Many Henson Trusts can qualify as a Qualified Disability Trust. This is a major benefit that is often overlooked. A QDT allows:
Access to graduated tax rates (similar to an individual) rather than being automatically taxed at the top rate.
Significant tax savings over the life of the trust.
Key Conditions:
The beneficiary must qualify for the Disability Tax Credit.
There can only be one QDT per beneficiary.
An election must be filed annually with tax returns.
Common Misunderstandings
Myth: “The beneficiary will lose benefits when money is paid.”
Fact: Not if payments are discretionary and structured properly.
Myth: “Withdrawals are heavily taxed.”
Fact: Capital is not taxed; income is often taxed at the beneficiary’s lower rate.
Myth: “It’s just a regular trust.”
Fact: A properly drafted Henson Trust has specific language regarding absolute discretion that “regular” trusts may lack.
When a Henson Trust is Especially Useful
You want to leave a significant inheritance to a disabled child or adult.
You want long-term protection, not just benefit preservation.
You are concerned about financial management, creditors, or potential exploitation.
This article was written with the assistance of:
Brittany Miller, Partner
Goddard, Gamage LLP
439 University Avenue, Suite 1700
Toronto, ON M5G 1Y8
T: 416-928-6685 x 240 | E: bmiller@ggslawyers.com
www.ggslawyers.com
For more information or advice regarding your specific Ontario, Canada, situation, please feel free to contact her.
