Are you looking into how to use Henson Trusts to shield wealth? Most wealth professionals don’t deal with Henson Trusts daily, but if you’re working with high-net-worth families with a disabled family member, you’ll need to get familiar with it. Remember that someone injured in the military can also be qualified to set up a Henson Trust.
These advanced trusts protect assets while keeping the beneficiary eligible for government benefits (disability payments), but they’re also a minefield if set up incorrectly. I’ve seen situations where a poorly structured trust completely derailed an estate plan, so getting it right from the start is non-negotiable.
The Basics: What’s a Henson Trust?
A Henson Trust is a fully discretionary trust that holds assets for a disabled person without disqualifying them from government assistance programs. That means benefits like the Persons with Disabilities program in Canada, which is Medicaid and Supplemental Security Income in the United States.
The beneficiary still has no control over distributions; the trustee holds all the power. This structure keeps the assets out of the beneficiary’s name and preserves their access to benefits, allowing them to claim the disability awards.
This structure also means picking the right trustee is crucial. Choose the wrong person, and the entire purpose of the trust collapses. You can hire a corporate trustee, assuming your client can afford it. The cost is generally between $5000 and $10,000.
Why Wealthy Families Use Henson Trusts
Wealthy families with disabled dependents often set up Henson Trusts because, without one, a sudden inheritance or financial gift can ruin a person’s eligibility for government benefits. Losing access to these benefits can mean missing out on critical support, even for families with money.
Another purpose is about protecting assets. I’ve seen situations where parents left a sizable inheritance to a disabled child, only for it to get tangled in a divorce or wiped out by creditors. A Henson Trust locks it down, shielding it from legal claims and ensuring the money supports the disabled person.
Tax planning is the hard part. Suppose the Henson trust owns a home in Canada, and the beneficiary lives there. In that case, the house can qualify for the Principal Residence Exemption, meaning no capital gains tax when sold.
Families in the United States use special needs trusts to circumvent Medicaid’s strict asset limits. If this isn’t structured correctly, a chunk of the inheritance could go to taxes or medical costs instead of helping the beneficiary.
There’s another problem. If the person receiving the trust can’t manage money; this structure ensures the funds last and are not mismanaged or taken advantage of. It puts control in the hands of a trustee who can make responsible financial decisions rather than handing a large sum to someone who might be unable to handle it.
Where It Goes Wrong: Common Mistakes
People repeatedly make the same mistakes with Henson Trusts. One of the biggest ones is letting the beneficiary act as a trustee. That completely defeats the purpose because it gives them control over the assets, which can make them ineligible for benefits. It’s an easy way to ruin the whole setup accidentally.
A very silly mistake that people make is setting up a Henson Trust when the person isn’t qualified as disabled. You can’t just say you are disabled. You need to be registered with the right groups, like the CRA in Canada.
Another issue is picking the wrong trustee. Many families default to a sibling or parent, assuming they’ll always do the right thing. But I’ve seen those situations get ugly fast. There can be family disputes, poor money management, or just general incompetence that can wreck a trust. A corporate trustee is usually a safer bet since they don’t have personal biases or emotional baggage. If you have a lot of assets, it’s worth spending the $5000-10,000 a year.
Tax Issues & Planning Considerations
The Principal Residence Exemption in Canada applies if the beneficiary lives in the home, but the trust must claim it annually to avoid capital gains tax. If the trust owns a rental property, income should be distributed to the beneficiary (who likely has a lower tax rate) or managed through income-splitting strategies.
In the U.S., Special Needs Trusts come in two forms:
First-party trusts (funded with the disabled person’s assets) require Medicaid payback provisions.
Third-party trusts (funded by family members) don’t have this requirement, making them more flexible.
One issue that can arise is that trusts are taxed at the highest bracket if income isn’t distributed correctly. A good wealth professional structures distributions to avoid unnecessary tax burdens.
Case Law & Precedents in the U.S.
Several major court cases have shaped how these trusts are treated. For example:
N.D. v. Division of Medical Assistance (2015, New Jersey) confirmed that correctly structured trusts don’t interfere with Medicaid.
Lewis v. Alexander (2012, 3rd Circuit) reinforced federal Medicaid rules trumping state restrictions.
Matter of the Estate of Sarah B. (2014, New York) set a precedent that absolute trustee discretion is critical to protecting assets.
These cases highlight why you need a specialist when setting up these trusts. One drafting error can lead to litigation or loss of benefits.
Henson Trusts Shield Wealth
Wealth professionals dealing with Henson Trusts must focus on the correct details, or the whole thing falls apart. The first step is understanding whether a Henson Trust (in Canada) or a Special Needs Trust (in the U.S.) makes sense for the client. Getting it wrong can mean unnecessary complications or lost benefits.
Once that’s clear, the legal and tax team must be involved early. Estate lawyers ensure everything complies with provincial, state, and federal laws, and accountants handle tax filings so the trust doesn’t trigger unexpected liabilities. Trying to cut corners here usually leads to costly mistakes.
Henson Trusts (and their U.S. equivalents) are among the best tools for families looking to provide for a disabled loved one without putting their financial security at risk. But they require precision. The wrong structure, trustee, or tax plan can lead to lost benefits, unnecessary tax bills, or even litigation.
If you advise clients on this, work with wealth professionals who’ve been through the process before. You don’t want to experiment with it.
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