Planning for disabilities
Christopher Mason / February 01, 2012
Barbara Turnbull was 18 when she was shot during a convenience store robbery in the early 1980s, leaving her paralyzed from the shoulders down.
The experience took a physical, emotional and psychological toll, but also left her facing a future of motorized wheelchairs, attendant care and home and vehicle modifications, in addition to other medical costs and concerns. Turnbull’s expenses were covered by the Workplace Safety and Insurance Board, but not all disabilities arise on the job.
“Nothing is cheap,” Turnbull says, noting for people without coverage, a new wheelchair every five-to-seven years can cost up to $40,000. The more specialized an item, the more expensive.
Provincial coverage varies. In Ontario, for example, the province covers 75% of significant equipment costs, which could include wheelchairs, orthopaedic braces and breathing aids.
But for people with disabilities, who face challenges in supporting themselves financially, their share of such costs can quickly become overwhelming.
In the early years after her injury, Turnbull struggled to manage donations that came in after her cause garnered national attention. She wound up with a sizable amount of unpaid taxes.
In 1991, she came to Bennett March IPC in Toronto and began working with advisors Valerie March and later Kathleen Peace.
For Peace, the process of support and planning for disabled clients runs far deeper than in her other client relationships and includes regular budget planning discussions and ensuring they’re working with an accountant experienced in disability issues.
“[The strategy] covered the bigger picture of costs, taxes and what I need to live independently,” Turnbull says. “A central part of our conversation was looking at how often I’ll need a new vehicle, and other big-ticket items.”
Still, advisors need to build a cost list that goes beyond core expenses. It can include vitamins and supplements (which can run $500 a month), physiotherapy, buying a vehicle, modifying that vehicle ($25,000), modified computers and software, and other related peripheral expenses that can easily total thousands of dollars each year.
Make sure they’re registered for the Disability Tax Credit. Then open an RDSP. Use the $1,600 captured via the tax credit to fund the annual $1,500 RDSP contribution. Ask if the client has claimed The Disability Tax Credit as far back as possible (10 years). a full recapture can net $16,000.
Non-medical costs come into play as well. One of Peace’s clients has a child with special needs and spends thousands each summer to send her children to camp. “They love it, and she regains her sanity,” Peace says. “It’s a non-negotiable expense.”
Peace does a comprehensive calculation that takes into account government and employer benefits, any settlement received from a lawsuit or insurer, anticipated equipment and care costs and other expenses unique to a person’s circumstances.
Another of Peace’s clients, Carolyn Pioro, was paralyzed in a trapeze accident in 2005. She received compensation meant to cover her current and future expenses.
In investing that sum, “The general approach is similar to anyone in their 30s planning for retirement,” Peace says. “We have a basic portfolio, 60% equity, 40% fixed income, with a maxed-out TFSA and RDSP.”
Incorporating the expenses associated with her disability into that approach took months. The process included ensuring Pioro could buy and retrofit a home to suit her requirements, without jeopardizing her long-term finances.
“[Now,] she has a comfortable condo,” Peace says. “She is looking for a job and knows her future is secure.”
Unfortunately, not all clients are so lucky. Several advisors have built their businesses around correcting financial plans that do more harm than good for disabled clients.
“I’m fixing a lot of mistakes,” says Graeme Treeby, a Stouffville, Ont.-based financial planner who co-founded the Special Needs Planning Group, a consortium of lawyers and accountants. The group also includes planners who have children with disabilities and advise families with disabled children.
Errors that Treeby and others often spot include specific misinformation, such as clients being told if they claim the disability tax credit, their disabled child will not qualify for the RDSP (see “Common Mistakes,” right).
Here are some bits of misinformation that are frequently passed on about RDSPs.
- WRONGTelling parents they no longer qualify for the tax credit if their adult child does not live with them.RIGHT The adult child can, in fact, live with them. The credit also applies when the child goes into supported living if the parents continue to provide food, occasional shelter or clothing.
- WRONGAdvising parents to charge rent to a disabled adult child if they also make meals for that child.RIGHT To avoid having to repay benefits, the adult child must plan and prepare their own meals, or if they are not capable of doing so, then someone must be paid to help with food planning and preparation for the lease agreement to be accepted.
- WRONGLetting an unmonitored mutual fund hit $5,000, so as to cause a client to be exempt from benefits.RIGHT RDSPs, Henson Trusts and segregated funds are the three tools to allow asset accumulation without jeopardizing government benefits.
More broadly, advisors say asset rules are too often misunderstood. To qualify for support in Ontario, people cannot hold more than $5,000 in liquid assets.
“I have a client who has become disabled and can no longer work,” Treeby says. “His advisor told him to qualify for ODSP he would have to spend all of his RRSPs. That is one way of doing it, but not necessarily the best way.”
Treeby instead put the money into a segregated fund RRSP, which allows a person to hold up to $100,000 while continuing to qualify for government support.
Segregated funds, RDSPs (see “RDSP Issues,” below) and Henson Trusts (see “Help special-needs clients have enough for the future”) are the three key tools people with disabilities can use to accumulate assets without jeopardizing government benefits.
For Henson Trusts, your client (or his or her guardian) will have to choose a trustee. So get to know the family members to understand whether either one of them, or a professional trustee, is best suited to manage a trust set up by parents to care for someone with disabilities.
“Early on, you want discussions among the family, bringing the kids in, to make sure they are on board with the planning,” says Rachel Blumenfeld, a partner at Miller Thomson LLP.
The ramifications of not using a Henson Trust are significant, so it should be at the top of your discussion list early in your relationship with a client with disabilities.
“I get a call every second day from executors saying their mom or dad has died, an inheritance exists and they heard there should be a Henson Trust,” says Kenneth Pope, an Ottawa-based lawyer.
“Most times we can fix it, but the trusts should be drafted into the will in advance, not at the last minute.”
Your client must first qualify for the disability tax credit. The RDSP allows those with disabilities to accumulate assets, and others (usually family members) to offer financial support, without affecting government benefits. There is no annual contribution limit, but there is a lifetime limit of $200,000. Contributions can be made from age 19 until the end of the year the beneficiary turns 59, and accessed at age 60.
“It’s a tremendous savings tool,” says Kenneth Pope, an Ottawa-based lawyer. But it’s also underutilized. Of more than 600,000 Canadians approved for the disability tax credit, only about 48,000 have opened RDSPs.
When establishing an RDSP with a lump sum, leave room for $1,500 annual contributions for 20 years to continue to qualify for up to $4,500 a year in matching government contributions, which stop at age 49.
Issues to be aware of include vesting rules, age limits, and competency for clients over the age of 18. If a person cannot sign for powers of attorney, a guardian may have to apply to the courts before they can sign the paperwork for an RDSP.
That was one of several issues catching the attention of a federal government review of the RDSP, announced in October. Others included legal guardianship in the case of an intellectual disability, as well as the 10-year rule that restricts when money can be taken out of the plan.
Modifications to your practice
You won’t have to make significant changes to your practice from a compliance and liability standpoint. With a physical disability, your client may prefer to receive documents in PDF form by e-mail so they can view them on a computer using assistive devices and programs. If you make home visits, take the same precautions as with any off-site meeting. Make sure any electronic devices are password-protected and encrypted, and take only essential documents related to the client you are meeting.
Clients will consistently be your best resource for what they need, especially if they and their families have lived with the disability for years.
Originally published in the February 2012 issue of Advisor’s Edge magazine.