Henson trust

A Henson trust is a very specific type of testamentary or inter vivos trust, a very powerful and enduring trust arrangement. It is an ancient English common law precedent, applicable in similar common law jurisdictions.

Note that the following is from a Canadian legal point of view.

It can be especially valuable for use to protect inheritances intended to assist children or family members with disabilities.

Often such a family member with disabilities or special needs cannot handle assets themselve, and if they came into such an inheritance they would be disqualified from other sources of social benefits and aids due to having assets above a very low test level.

The trustee of such a trust has an 'absolute discretion' as to whether to give assistance to the beneficiary, or not to do so. This power puts the trust essentially above any successful attack. The trustee cannot be compelled by the beneficiary to support them, although this assistance is the intent of the deceased. Accordingly the trustee must be picked with care, and it may result that several trustees are appointed, or that an impartial trust company is used.

The asset itself is 'non-vesting' in the beneficiary, meaning that the asset does not beneficially belong to the beneficiary as is the usual rule.

Since the child can't compel payouts, and doesn't have any legal right to the asset, social benefits are not cut off. Meanwhile, the trust is used for the child's benefit, without disqualfying the benefit recipient from other sources of support such as asset and income tested disability benefits.

The trust is also very useful to reduce taxation on income generated by an inheritance, since the income is taxed in the hands of the trust at marginal increasing tax rates, not in the hands of an heir in a high tax bracket.

In this scenario, the trustee of the trust would also be the primary beneficiary, and their children, the grandchildren of the deceased testator, would typically also be beneficiaries of the trust. The trust would then attribute income to the children, making use of their personal tax exemptions, often reducing taxes exigible to nil amounts.

This is a much better outcome for the family than paying taxes on the income, reducing the net benefit available to the intergenerational family substantially.

Such a trust would be exempt from the division of matrimonial assets in virtually all cases. If a parent senses that their married adult child may have a rocky marriage relationship, they could set up a Henson trust for that child to ensure that the spouse does not share in the inheritance upon divorce.

Since there would also likely be a tax advantage, one would normally not have to raise the spectre of the matrimonial concerns, putting forward only the tax benefits.

The trust would also serve to protect the inherited asset from claims by creditors, and could serve as a receptacle to receive an inheritance from a parent for reasons such as the adult child having filed for bankruptcy and the parent dying in the year of bankruptcy.

Normally, an inheritance in the year of bankruptcy would go to the Receiver and then back out to the creditors. When received into a Henson trust this would not occur, and when the adult child is released from bankruptcy the funds would still be available for their benefit and advancement, as intended by the deceased parent.

It may be helpful to keep in mind that this protected inheritance is being passed on by the now deceased parent and is protected by the arrangement established by them. Such an arrangement may be set up at the request of a child standing to inherit, but the estate planning and estate arrangements are made by their parents in their Wills.

The use of a normal 'discretionary, vested' trust rather than an 'absolute discretion, non-vested' trust would not deliver the same powerful protective advantages, although it would have some advantage still.

When in doubt when estate planning for the unique variables in each family, including disabilities, high taxation, matrimonial concerns, litigation and creditor risks, and spendthrift concerns, the default choice should be a Henson trust.

If compelling reasons can be shown why a trust arrangement is not needed or could cause more problems than it solves, then professional advisors can advise as they see fit. Not considering the proper use of protective trusts, especially Henson trusts, would indicate a lack of professional diligence.

The best approach is not to ask "Do I need a trust in my Will?" but rather to ask "If you don't have a trust arrangement in your Will, what's the good reason why not?"

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