Friday, September 27, 2019

Henson Trusts: The Supreme Court of Canada Saves an Important Estate Planning Tool for Canadians with Disabilities


Henson trusts for persons with disabilities have long been an important way for Canadian families to provide for children or adults with physical challenges.
A 2017 decision from British Columbia appeared to seriously limited the usefulness of these trust accounts. In January 2019, to the relief of many, the Supreme Court of Canada reversed that ruling in S.A. v. Metro Vancouver Housing Corp.
The importance of the accounts, commonly known as “Henson Trusts” has been that they allow money to be set aside for a disabled person, with money from the trust to be paid to that person every year, without the trust being considered part of the disabled person’s ‘assets’ for the purpose of some government programs that are means-tested.

These programs include the Ontario Disability Support Program (ODSP), Guaranteed Income Supplement, and access to housing that is geared to income.

Under a Henson trust, the disabled beneficiary has no discretion over the trust funds and is not able to request that the trust be collapsed and paid out in a lump sum or the terms of the trust amended.

The way the beneficiary is prevented from gaining that discretion over the trust funds is by naming a second beneficiary who receives a portion of the funds in trust after a certain period of time, thereby splitting the legal interests in the trust between two people. The Trustee retains complete and absolute discretion over the trust fund, and can exercise that discretion to make payments from the trust to the beneficiary each year in an appropriate amount, or not at all.

Because the beneficiary never has discretion over his or her own trust funds, it is impossible from a legal standpoint to attach a value to the trust for the purpose of reporting his or her assets, and the trust remains a sort of legal ‘black box.’

These ‘Henson Trusts’ have for years allowed people with disabilities to receive vital additional money each year. For the purpose of means tested programs, these funds are typically excluded, rather than being regarded as part of the recipient’s income.

There was a considerable ripple of dread that spread through the estate, trust and disability communities in 2017 when the Court of Appeal of British Columbia released a decision that required a person with a disability to disclose a ‘Henson Trust’ on an application for subsidized housing. 

The BC appeal judgment found that the Henson Trust that designated the appellant, “S.A.” as a beneficiary was really an asset that she owned. Having to disclose that asset could disqualify her and other people with disabilities in a similar position from qualifying for supports. The Court of Appeal found that the interest the beneficiary had in the trust, despite the trust being discretionary, was clearly worth something as an asset:
[54]        While S.A. may not have a vested interest in the Trust, she clearly has a beneficial interest. If she wishes to apply for a rental subsidy she must disclose the amount in the Trust. […]
[56]        I agree with the chambers judge’s analysis that the Trust is an asset of S.A. and that [Metro Vancouver Housing Corporation] is entitled, pursuant to the provisions of the Assistance Application, to the further information it requested concerning the Trust to assist it in determining whether to provide rental assistance.”
The Supreme Court of Canada revisited the nature and character of the classical Henson Trust:
[35]  The Trust at issue in this case has the essential features of a Henson trust. The terms of the Trust do not confer any fixed entitlements on S.A., and instead provide the Trustees with ultimate discretion over any distributions that might be made out of the Trust’s income or capital for S.A.’s care, maintenance, education or benefit (art. 1(a)(iv)(A)). Importantly, they specifically provide that the Trustees, in exercising their discretion, can decide not to make any distributions to S.A. at all. […] 
[36] It is thus clear that, although the Trustees have an obligation to consider whether to make distributions out of the Trust for S.A.’s care and maintenance, they are not actually required to distribute any of the Trust’s assets either to her or for her benefit. […] S.A. therefore does not have an enforceable right to receive anything unless and until the Trustees decide to exercise their discretion in her favour. 
[38] Another key aspect of the Trust is that it is structured so that it cannot be unilaterally collapsed by S.A. under the rule in Saunders v. Vautier, according to which a beneficiary of a trust (or multiple beneficiaries acting jointly) can terminate the trust and demand that the trustee convey legal title over the corpus of the trust to him or her — but only if the beneficiary has capacity and is absolutely entitled to all the rights of beneficial ownership in the trust property […]. Analyzing this rule in the context of the present appeal, it is important to observe that under the terms of the Trust, any remainder of the trust fund must pass to some third party upon S.A.’s death: art. 1(a)(iv)(C) and art. 1(a)(iv)(D) specifically prohibit her from appointing either herself or her creditors as remainder beneficiaries. The effect of this “gift over” is that S.A.’s interest in the Trust is not absolute, and therefore prevents her from terminating the Trust on her own in accordance with the rule in Saunders v. Vautier […]. 
The Court then went on to consider how this characterization applies to S.A. and her entitlement to be considered for housing:

[54] With respect, I am of the view that the Chambers Judge’s understanding of S.A.’s interest in the Trust represents an error of law. As explained above, S.A […] has no fixed entitlement to the assets settled therein, and is precluded from unilaterally collapsing the Trust for her benefit (see para. 39 of these reasons). Given that the Trust only provides her with what is essentially akin to a mere hope of receiving some or all of the property at some point in the future, the Chambers Judge’s conclusion that S.A.’s interest in the Trust is “more than a mere possibility” — such that it falls within the meaning of the word “assets” as used in the Assistance Application — cannot stand.

The Supreme Court has affirmed, thus, what the essential characteristics of a Henson Trust are, and has ruled that the trust does not have the character of something that is owned by the beneficiary. Instead, the trust has a status that is somewhat akin to a generous family member that can, and often does, but is not legally obligated, to provide for the beneficiary.

We should save a word or two for the partial dissent of Justices Rowe and Brown.

Whether or not having a Henson Trust in one’s name is an “asset” or just a possible source of support, it is something than can put some disabled persons materially on a different footing than others. One can very much make the argument that whatever the status of a Henson Trust, government agencies still need to make tough decisions about how to ration the chronically short amounts of money that are allocated every year to assisting Canadians with disabilities.
Rowe J. addresses this point:

[88] This highlights a further problem with granting declaratory relief in the circumstances. This is that contrary to the suggestion of the majority, a declaration as to the meaning of the word “asset” does not settle the “live controversy” between the parties (majority reasons, at para. 61). While the parties have disagreed about the meaning of the word “asset” throughout these proceedings, resolution of this point does not settle the matter of S.A.’s entitlement to rental assistance, the reason for which declaratory relief is sought by S.A. and seemingly granted by the majority. This is because it is not for the courts to decide how MVHC utilizes its resources. A declaration as to the meaning of the word “asset” only settles the live issue between the parties if one also accepts that, in addition to having a contractual obligation to consider completed applications, MVHC is bound to a particular framework for the determination of who is to receive rental assistance. For the reasons I have set out above, I differ from the majority on the contractual obligation issue.

It will remain to be seen whether further attention is paid to this point raised in dissent at some time in the future. But this may be an important point to consider for lawyers, people with disabilities, and estate clients. As more and more Canadians age with chronic disabilities, shortfalls of funding for programs will probably make eligibility decisions tougher, not easier.

The time may come again that a government program or agency has to take a hard look at whether it is able to provide for clients with this extra income, and without.

When that time comes, will Canada’s top court protect the Henson Trust again?

- Paul B. Adam, Toronto

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