Back in August, we released a piece called, What You Should Know About The RDSP. In it, we referenced a future case study revolving around an RDSP. Well low and behold, here it is.
This case study is based on a financial plan we presented. It is important to remember that this was not created specifically for you. Although it is sound advice for those it was presented to, this does not constitute advice for the general public. Before acting, talk to your financial advisor, or contact us. Financial plans are not a one-size fits all and need to take every aspect of the individuals life into account.
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The case study that follows is centered around disabilities. Although the family in question is a farming family, the farm planning aspect will be minimal.
The original financial plan was created for a couple, we will call them Scott and Lacy, both of which are retired. The family and their farm, of 3 quarter sections of land, is located in Alberta. Scott and Lacy’s current monthly expenditures are about $3,000. They expect it to stay fairly consistent. In addition to the parents there were two daughters, and a son to consider.
Their son Dan is permanently disabled and qualifies for the Disability Tax Credit. Dan is unable to work and is fully dependent on his parents.
Maxine, the eldest daughter is married to a farmer and is already a joint owner of the home half section of land. The other daughter, Mary, lives in Ontario and has no interest in the farm. However, Mary has received $450,000 from the parents in cash to help with a home purchase in Toronto.
In our meetings with Scott and Lacy, the goals that were discussed and identified were as follows:
- Develop an estate plan where their disabled son, Dan, will have lifetime financial support.
- Review possible options for Scott and Lacy to qualify for the Qualified Farmland Capital Gains Exemption and other tax efficient options.
- Provide recommendations on how to structure a legacy for the next generation.
Now that we have met the family and identified their goals, lets look at some options.
A Strategy to Support Dan
We provided five options to Scott and Lacy to help provide life long financial support to Dan. Before looking at the specifics, there are a few considerations to be aware of. If Dan we to receive a large inheritance, the provincial disability support programs he is reliant on my be impeded significantly.
For example AISH, has a policy in place where, if Dan receives $100,000 in cash inheritance, and his monthly disability benefit is $2,000, his benefit would stop for the next 50 months.
To avoid this there are several options that can be utilized.
Registered Disability Savings Plan
We looked at the RDSP quite in depth in What You Should Know About The RDSP, but here is a summary of some key features:
- A yearly contribution of $1,500 for Gary will receive a matching $3,500 grant from the government. Proceeds can be invested, and all income and growth inside RDSP is income tax sheltered.
- There is a lifetime maximum contribution limit of $200,000 prior to 59. This amount is also reduced by any rollovers and prior contributions.
- Maximum lifetime grant available is $70,000 and maximum lifetime bond available is $20,000. This is only available until Gary’s age 49.
- Unused grant and bond room can be carried forward for 10 years prior to age 49. Annual max carry-forward is $10,500 for grants and $11,000 for bonds.
- Withdrawals for any reason can start after age 60.
- Funds from a RRSP/RIF can be rolled over into a RDSP if the beneficiary is mentally and physically impaired and financial dependent on the RRSP/RIF owner.
- Rollovers must occur within 6 months of death of the RRSP/RIF holder.
- Grants are not available on amounts “rolled over” from RRSP/RIFs.
In this particular case, a good strategy would be to review Dan’s RDSP at age 49 to see how much contribution room, as well as grants and bonds are still available. It may be advantageous to do a top up contribution. Dan would not receive matching grants or bonds unless there is still carry-forward available. However, the funds would grow tax deferred and create a large benefit for his future.
RIF Rollover to Dan’s RDSP
This is already mentioned above. However, the parents making Dan the beneficiary of their respective RRIFs and stipulating in the Will that the proceeds are to go to the RDSP up to the $200,000, no tax would have to be paid on their final passing. No matching grants or bonds would be available. Furthermore, any amount that would push lifetime contributions above $200,000 would not be eligible.
Transfer RIF to Lifetime Benefit Trust
This would be done by making Dan the beneficiary of the RRIFs and stipulating in the parents Wills for this to happen. Upon death of Scott and Lacy, the funds would be transferred to a new Lifetime Benefit Trust. Dan would be the sole beneficiary of the trust.
Upon the transfer to the trust, a Qualifying Trust Annuity must be purchased. It must have a fixed term of 90 years, minus Dan’s age (46).
Any income received from the Trust must be disclosed to the provincial disability support program. Normally the first $6,000 of other income is exempted from the means test and no reduction to disability income occurs.
Establish a Henson Trust
In some provinces, Alberta being one, you can establish a Henson Trust at any time with a legacy of $100,000 or less. It must be an absolute discretionary trust the gives the disabled beneficiary no rights to enforce payments of either income or capital.
As a result, the capital of the trust does not count towards the recipients asset limit, and only income received is counted towards the income limit.
Establish a Family Trust
Lastly, a family trust could be established. This would be the least preferable option. It is likely that the provincial disability regulator, in this case AISH, would consider all trust assets to be Dan’s. Thus, they would require all trust assets be fully utilized before disability benefits were reinstated.
In addition, all trust investment income is taxed at the highest personal tax rates.
This option could be viable if you want the family to continue to control the investment assets and be more generous in the financial support of Gary than what AISH would mandate.
Our Recommendation to Support Dan
Our recommendation used several of the components mentioned above. We wanted to ensure lifelong support for Dan without jeopardizing provincial support benefits and Scott and Lacy’s further retirement.
We recommended four things to focus on regarding Dan’s future financial support. First, make sure that the RDSP contributions are maximized. If not done during Scott and Lacy’s lifetime, then through RRIF rollovers on their final passing.
Secondly, Establish a new Henson Trust and fund it with $100,000. Following that, ensure that Dan is the beneficiary of Scott and Lacy’s RRIFs. Whatever is remaining after contributing up to the $200,000 RDSP lifetime maximum should be used to fund a Lifetime Benefit Trust with Dan as the sole beneficiary.
Lastly, it is important the Scott and Lacy’s Wills are updated to reflect these wishes. It is prudent to sit down every 5-10 years and review your Wills or as life circumstances change. This would definitely be a situation where life circumstances/estate wishes have changed or been modified. Thus an updated Will is necessary.
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Disclaimer: This Forbes Wealth Blog is for informational purposes only and does not constitute financial, legal, or tax advice of any kind. Please consult your legal, accounting, tax, investment, banking, and life insurance professionals to get precise advice relating to your particular situation before acting upon any strategy