Estate planning is important for everyone. It’s of even greater significance if you have a child with special needs. Preparing for your child’s future can seem overwhelming but it’s wise to be prepared for his/her requirements and for the unexpected.
There are two basic types of planning that parents of a special needs child need to undertake;
Inter-vivos planning: This is planning that operates during the parent’s lifetime and includes:
- An enduring power of attorney: This is a document that authorizes another person to act as proxy in all business and legal matters if you lose your capacity to make decisions. If you’re incapacitated, the agent would be able to deal with the financial assets and legal affairs pertaining to your special needs child. Once your child turns 18, he/she is considered an adult in the eyes of the law giving your child the right to make medical and financial decisions. If your child is not capable or needs guidance, consider assuming legal guardianship or power of attorney and health care proxy. This way you maintain the same supervision and control you had when your daughter/son was younger.
- A living trust is a legal entity created by you and administered by a trustee for the benefit of your special needs child. The income can be distributed to your child as an allowance or can be used to cover expenses. A living trust pays the top rate of income tax and is usually used strictly as a flow-through vehicle whereby you pay dividends that immediately flow out to your child.
Testamentary planning: This is planning that becomes effective upon your death and includes:
- A will: This is a legal document that communicates your final wishes pertaining to possessions and dependents. By writing a will, you can make sure that your assets are left to a special needs trust and not to your child. You can also specify a guardian to take care of your child.
- RDSP: A registered disability savings plan can be set up by a disabled person or the parents/guardian of a disabled individual. Funds contributed to this plan grow on a tax-deferred basis and provide future income for your child. However, contributions are not tax deductible. An RDSP also qualifies for government grants; matching grants of up to 300 percent. Your child can have only one RDSP at a time, though anyone can contribute to it.
- RRSP: Cash placed in a disabled child’s registered retirement savings plan can grow and compound, tax-deferred, until they need it. Naming your special needs child as beneficiary of your RRSPs, means they would get the full value of the plan, while the tax liability would go to your estate.
- RRIF: A registered retirement income fund is a tax-deferred retirement plan under Canadian tax law. If your special needs child is designated the beneficiary of your RRIF contract, the amounts are paid out to that child rather than to your estate.
- TFSA: If made in your child’s name, a tax-free savings account allows you to avoid paying tax on funds that you intend to gift through your will. TFSA withdrawals can be used for any purpose making them a flexible source of extra income. Name your disabled child as the beneficiary of your TFSAs and the value of your plan at the time of your death will go tax-free to your child. Please note your child needs to be 18 year or over if it is in their name.
- A life insurance policy: Taking out a life insurance policy is a way to ensure your child is taken care of financially in the event that something happens to you and/or your spouse. Consider buying your special needs child a life insurance and/or critical illness insurance policy. Do not name your child as the owner of the policy as whole life insurance policies with cash value could terminate their government assistance.
- A trust: A properly drafted trust provides the trustee(s) with unfettered discretion to make payments and a testamentary trust pays income tax at graduated rates. You can make your child’s trust the beneficiary of your life insurance policy and your estate.
If your child has special needs, reduced mental capacity or physical challenges that prevent him/her from managing their own affairs, you’ll want to ensure that your estate planning will address your child’s unique requirements. Consult with an experienced estate planning team. They will have the knowledge, expertise and experience to help you make a plan that is right for you and your child.
MacMillan Estate Planning offers a holistic approach to estate planning with all the people, processes, and technology that you need to plan your estate – either in person or virtually. Our team of lawyers, accountants, financial planners and counsellors offer a refreshing alternative to the banks, law firms and accountancy firms. Register for one of our upcoming seminars. You can also take advantage of our complimentary virtual consultations; call us or email us: 1-833-266-6464 and firstname.lastname@example.org.