RRIF/RRSP Rollovers and Lifetime Benefit Trusts
This is a brief note for estate lawyers and accountants practicing in this area.
As you know well, when anyone with an RRSP or RRIF passes away, she will be considered to have received the entirety of her RRSP or RRIF into her income unless a rollover applies. The typical rollover is to a spouse or common law partner. However, the legislation also permits a rollover to a child or grandchild of the deceased who is dependent on the deceased financially because of mental or physical infirmity.
Under certain circumstances, a direct transfer to an individual with disabilities may not be appropriate, particularly if the individual with the disability also relies on means-based government support. Specifically, receipt of these funds may result in the individual losing access to this government support, which in certain circumstances could be worth more to the beneficiary than the amounts in the RRSP or RRIF.
Fortunately, there’s a solution. Enter the lifetime benefit trust (“LBT”).
Lifetime Benefit Trusts
The LBT is a variation of the Henson Trust. The core purpose of a Henson Trust (so named because of the Ontario case which gave rise to these trusts) is to permit an individual with disabilities to maintain government support while at the same time protecting that person’s assets.
LBTs are Henson Trusts settled for a child or grandchild of the deceased who is dependent on the deceased financially or, alternatively, a spouse or common law partner of the deceased (an “Infirm Beneficiary”). In each case, the Infirm Beneficiary must be mentally (not physically) infirm.
An LBT would make sense for a client if each of the following is true:
the client/client’s estate has a sizeable RRIF/RRSP;
the client’s spouse/common law partner/child/grandchild is disabled and dependent on the client financially (the Infirm Beneficiary must also not have an income greater than the basic personal amount, or $15,000); and
the client would like to preserve the Infirm Beneficiary’s government benefits.
The requirements for an LBT are as follows:
while the Infirm Beneficiary is living, no person other than the Infirm Beneficiary may receive or otherwise obtain the use of any of the income or capital of the trust;
the trustees must be empowered to pay amounts from the trust to the Infirm Beneficiary;
the trustees must be required to consider the needs of the Infirm Beneficiary (including comfort, care and maintenance of the beneficiary); and
the funds must be used to purchase a specific type of annuity.
Ideally, you would catch this circumstance before the client passes, in which case you could draft a testamentary LBT to arise from the will of the client, or otherwise suggest the client’s lawyer draft such a trust. If the circumstances arise once a client has passed, it appears still possible to have an inter vivos LBT.
If you have any further questions about LBTs (or tax or trust questions in general), you can feel free to reach out to us. The author can be contacted directly at jonathan@rkwlaw.ca or 604.425.1123.