Saving solutions for disabled individuals

RDSPs are the best bet, but there are other options.

Deanne Gage 25 August, 2011 | 6:00PM

You're a parent or caregiver of a disabled child and want to ensure they have a steady stream of income in the future. What are some of your options?

Your best bet is the Registered Disability Savings Plan (RDSP), which became effective in 2008. The RDSP works as follows: you make contributions during your lifetime (there's a lifetime limit of $200,000) using similar eligible investments as for an RRSP, and all the income and growth is tax-deferred until amounts are withdrawn from the plan.

RDSPs differ from RRSPs in that contributions are not tax-deductible. Therefore, you cannot use RDSP contributions to reduce the amount of income tax you currently pay. Instead, incentives for your contributions come in the form of the Canada Disability Savings Grant (CDSG) and Canada Disability Savings Bond (CDSB).

For the 2011 tax year, if your family's net income was below $83,088, the CDSG pays 300% on the first $500 contributed and 200% on the next $1,000. That translates into your disabled child receiving $3,500 in government grants for a $1,500 contribution, notes Frank Di Pietro, director of tax and estate planning for Mackenzie Financial.

What if your family net income was above $83,088? The CDSG decreases slightly, forking over 100% on contributions of up to $1,000.

You can contribute more than those minimum amounts each year but Di Pietro says to think strategically since "you're only going to get the grants and bonds that you're entitled to for that particular year." You'll have to wait for the additional grant money each year thereafter. (The lifetime limit of CDSG is $70,000, and is available only until the disabled beneficiary turns 49.)

Recent enhancements to the RDSP now allow you to carry forward any unused grant room if you have missed making a contribution for a particular year, Di Pietro adds. "Your cash flow may fluctuate year to year and so this adds greater flexibility for disabled families looking to maximize the use of RDSPs in financial planning."

The disabled beneficiary will have to start withdrawing income from her RDSP in the year she turns 59. The CDSG money and capital gains accumulated on the income are taxable to the beneficiary.

What are some of the RDSP pitfalls? For one thing, the plans are not as helpful for disabled individuals aged 50 and up, since they're too old to qualify for the RDSP grant money, notes Janet Freedman, a fee-only financial planner at Finance Matters in Toronto and co-author of Hit By An Iceberg: Coping With Disability In Mid-Career.

They also won't be able to benefit from "the accumulation and compounding in an RDSP to really be able to provide a substantial income down the road," she says.

Despite this, an RDSP for older disabled individuals is still a valid idea since the plan is creditor-protected, the funds cannot be paid to anyone other than the beneficiary, and it won't jeopardize any provincial disability benefits the individual may receive, Freedman says.

An alternative for parents who have substantial assets is to buy life or term insurance, or certain annuities on themselves, with the disabled child as the beneficiary, she adds.

Canada Disability Savings Bond

Lower-income families may qualify for a Canada Disability Savings Bond. For the 2011 tax year, families who earned less than $24,183 in net income are entitled to an additional $1,000 into the beneficiary's RDSP through this program, with a lifetime limit of $20,000. "If you earn more than $24,183, the amount is clawed back and once they earn $41,544, they are not entitled to this," says Di Pietro.

Henson trust

In terms of estate planning, your first instinct might be to simply draft a will, leaving your assets to your disabled child. While having a will is important, you will need to do more planning with an advisor and/or lawyer or you may jeopardize any disability benefits your child receives.

"In most provinces, if you just gift money to the disabled individual, they are going to cut any government disability support and they won't be entitled to it going forward," says Di Pietro.

A Henson trust, set up by an estate lawyer, is a possibility. A trustee is appointed (either a family member or outsourced professional) to oversee the trust and has the discretion to control how and when the assets are distributed to the disabled child, says Di Pietro. "If structured properly, the Henson trust works because the inherited assets in the trust do not affect the income that the disabled individual would receive from various disability programs," he says.

One caution, though: a Henson trust should have substantial assets (at least $400,000) to make it worth its while, Freedman says. "With Henson trusts, you have to pay the lawyer to set it up, there are trustee fees, trust tax returns to do and if you're not careful, they'll be nothing left for the beneficiary," she says. "If you've only got $50,000, the RDSP is a far better way to go."

Parents or caregivers can transfer their registered funds to an RDSP (to the maximum RDSP $200,000 lifetime limit) without being taxed, she notes.

Estate planning for disabled individuals has complex tax rules and structures, so consult a lawyer, accountant or advisor who specializes in this area.

About Author

Deanne Gage

Deanne Gage  Deanne Gage is a Toronto-based writer who has specialized in personal-finance issues since 1999. A recipient of several journalism awards, including one from the Investment Funds Institute of Canada, she is also a former editor of Advisor's Edge and Advisor.ca. She can be reached at deannegage@gmail.com.