I have previously blogged about the new “qualified disability trust” (“QDT”), which is one of two exceptions to the new rule, effective January 1, 2016, that income accumulated in a testamentary trust is taxed at the highest marginal rate. In this blog I will focus on the requirement that a QDT have at least one “electing beneficiary” who is named in the trust (and qualifies for the disability tax credit or “DTC”).
The naming requirement is found in the definition of “qualified disability trust” in subsection 122(3) of the Income Tax Act; it provides that the electing beneficiary must be “named as a beneficiary by the particular individual [i.e. the deceased] in the instrument under which the trust was created”. In some cases, this requirement will not pose any particular difficulty. Here I have in mind the client who has a child with an existing mental or physical disability who receives benefits under the Ontario Disability Support Program (“ODSP”). Where a child is receiving ODSP benefits, the parents are often already aware of the need for planning to maintain eligibility for benefits and have heard of Henson-style trusts. Typically, if a Henson-style trust is used to preserve eligibility for benefits a separate trust is established under the will that specifically names the benefits-recipient. So long as the benefits-recipient also qualifies for the DTC, the trust will qualify as a QDT.
In some cases, however, a person will qualify for the DTC but not for ODSP benefits. Although a Henson-style trust is not needed since there are no ODSP benefits to be protected, a QDT could still be used to take advantage of graduated rate taxation for the DTC-eligible beneficiary. However, where the beneficiary is not receiving ODSP, a client may not be attuned to the need for planning in relation to the beneficiary’s disability, and is unlikely to be aware that qualification for the DTC could be relevant to an estate plan. If the client does not advise the will drafter and, as a result, generic language (e.g. “child” or “issue”) is used in the will, any share held in trust for the DTC-eligible beneficiary will not qualify as a QDT. Accordingly, when gathering information from clients, questions relating to disabilities should be cast broadly. Rather than simply asking if any potential beneficiaries are receiving ODSP benefits, clients should be asked if any potential beneficiary has a mental or physical impairment of any kind or severity. This should be supplemented with specific questions about whether any potential beneficiary receives any type of disability benefit or is eligible for the DTC.
In still other cases, there will be no beneficiary who qualifies for the DTC at the time the will is prepared, but a beneficiary qualifies for the DTC after the date of the will. Unless there is a specific reason to name beneficiaries (e.g. a lifetime trust is established for a specific child), general language is often used in a will. For example, the residue might be divided among “my children alive on the date of my death” with an alternate gift to the “issue alive on the date of my death” of a child who has predeceased. In that case, if a child qualifies for the DTC after the date of the will, unless the will is updated to specifically name that child, any share of the residue held in trust for that child will not qualify as a QDT. Where possible, drafters might consider naming particular beneficiaries (e.g. gifts to children for clients who will not have further children). If it is not possible or practical to do so in the dispositive provisions of the will (e.g. gifts to children where future children are likely, or gifts to remoter issue), and so generic terms such as “children” or “issue” are used in the dispositive provisions, drafters might consider including interpretation clauses that name the beneficiaries who are alive at the date of the will (e.g. “As of the date of this my will, my children are…” or “As of the date of this my will, my issue are…”). There are no rulings or technical interpretations from the Canada Revenue Agency as to whether this approach would be sufficient for those beneficiaries to be considered “named” in the trust instrument, but it is hoped the CRA will take a flexible approach. Of course, this approach does not deal with the problem for beneficiaries who are born after the date of the will. The QDT, then, is one more reason why it is important for clients to periodically review and update their estate plans.