This is the second in a two-part blog post on estate planning for families with a loved one on ODSP. In our first post, we explained how an unplanned inheritance can unintentionally disqualify an ODSP recipient from their benefits. In this post, we walk through some of the legal tools available to prevent that from happening – and what to do if no planning was done before an inheritance was received.
Quick reminder: the asset limit for a single person on ODSP is $40,000 as of the time of this blog. The goal of all the tools below is to ensure as much of an inheritance as possible falls outside that calculation entirely.
A Quick Reference
Here is a summary of the main planning tools, before we go into detail on each:
| Tool | Who Can Use It? | Cap? | Requires Disability Tax Credit? |
| Henson Trust | Anyone – must be set up in the testator’s Will | No cap | No |
| Trust Derived from Inheritance | ODSP recipient (self-settled, after the fact) | $100,000 combined limit | No |
| RDSP | ODSP recipient | $200,000 lifetime contributions | Yes |
| Exempt asset purchase | ODSP recipient | Depends on asset type | No |
Tool 1: The Henson Trust
If you have a family member on ODSP, a Henson Trust in your Will is almost always the most powerful and flexible planning tool available. Named after a landmark 1987 Ontario Court of Appeal decision, it is not a complicated or exotic arrangement. It is a standard provision that your lawyer can include in your Will.
How it works
A Henson Trust is a discretionary trust created within your Will. When you pass away, the assets you designate flow into the trust rather than directly to your family member. A trustee you appoint manages those assets and has complete discretion over if, when, and how much to pay out for the benefit of your loved one.
Because your family member has no legal right to demand payment from the trust, ODSP does not treat the trust capital as their asset. There is no cap on how much the trust can hold – whether it contains $50,000 or $500,000, your family member’s ODSP eligibility is preserved.
What makes a Henson Trust work
- The trustee must have absolute discretion over distributions – any obligation to make mandatory payments can undermine the trust’s exempt status.
- The trust must be established by a third party – typically through your Will. Your family member cannot create a Henson Trust for themselves using inherited funds.
- The trust must be disclosed to ODSP, which will review the trust document to confirm it meets the requirements.
- Choosing the right trustee is essential: someone who is trustworthy, capable of managing assets, and understands the responsibility they are taking on.
A note on life insurance
A Henson Trust is a testamentary trust – it only comes into existence when you die. This means it cannot be named directly as a beneficiary on a life insurance policy (which requires a currently existing legal entity). If you want life insurance proceeds to flow into a Henson Trust, the solution is typically to designate your estate as the beneficiary for that portion of the policy, with the funds then flowing into the trust under your Will. Your lawyer can advise on the estate administration tax implications of that approach.
A Henson Trust is the only planning tool with no cap on the capital it can hold while preserving ODSP eligibility. If the inheritance you are planning to leave is significant, it is often the only tool that can fully protect your family member’s benefits.
Tool 2: Trust Derived from Inheritance (When No Henson Trust Exists)
What happens if a family member on ODSP receives an inheritance directly, with no Henson Trust in place? Ontario’s ODSP regulations do provide one post-receipt option: a Trust Derived from Inheritance.
An ODSP recipient who inherits money or receives life insurance proceeds can place up to $100,000 of those funds into a trust for their own benefit. ODSP will treat those funds as an exempt asset, up to that $100,000 limit. This limit also includes the cash surrender value of any life insurance policies the recipient owns, so it is important to account for those before calculating the available room.
Key conditions
- The funds must come from an inheritance or life insurance proceeds – funds from other sources do not qualify.
- The recipient must have the legal capacity to establish the trust themselves, or a legally appointed substitute decision-maker must act on their behalf.
- ODSP will typically allow up to six months after the inheritance is received to establish the trust. The funds are treated as income in the month received.
- The trust must be disclosed to ODSP.
What about amounts above $100,000?
If the inheritance exceeds the $100,000 cap, the excess needs to be sheltered using other exempt options (see Tools 3 and 4 below), or it will count against the asset limit. This is why advance planning matters so much: a Henson Trust has no cap, while a Trust Derived from Inheritance does.
Tool 3: The Registered Disability Savings Plan (RDSP)
An RDSP is a federally registered savings plan under the Income Tax Act (Canada). All funds held in an RDSP are fully exempt from ODSP’s asset calculation, regardless of the amount. An RDSP also offers significant government contributions – through the Canada Disability Savings Grant and Canada Disability Savings Bond – making it one of the most tax-efficient savings vehicles available to people with disabilities.
Key parameters
- Lifetime contribution limit of $200,000.
- Government contributions of up to $90,000 may be available depending on the beneficiary’s age and income.
- Investment growth within the RDSP is exempt from both asset and income calculations for ODSP purposes.
- Transfers from an exempt trust (such as a Henson Trust or Trust Derived from Inheritance) into an RDSP are treated as exempt conversions – they are not counted as income.
The key condition
The beneficiary must be approved for the federal Disability Tax Credit (DTC) to open and contribute to an RDSP. If your family member does not currently hold DTC approval, this option is unavailable until they obtain it. Given the potential benefits, it is worth exploring DTC eligibility as early as possible.
Tool 4: Purchasing Exempt Assets
An ODSP recipient can use inherited funds to purchase assets that are exempt from the ODSP asset calculation. Once converted into an exempt asset, those funds no longer count toward the $40,000 limit. Eligible exempt assets include:
- A principal residence (paying down or purchasing the home they live in)
- One motor vehicle, regardless of value
- Prepaid funeral arrangements
- Approved disability-related items, equipment, or services
This option is most useful for absorbing smaller amounts of excess inheritance, or as a supplement where the Trust Derived from Inheritance cap has been reached and RDSP is not available. It depends entirely on whether the purchase makes sense given the recipient’s actual circumstances and needs.
Two Things That Don’t Work
A few common approaches that families sometimes consider – but that will not protect a loved one’s ODSP benefits:
Informal family arrangements
Leaving money to a sibling or other family member with an informal understanding that they will look after the ODSP recipient is not a reliable solution. It provides no legal protection for your loved one, and if ODSP determines the recipient has a beneficial interest in the funds, they may be counted as assets regardless.
Transferring funds after the fact
An ODSP recipient cannot simply give away inherited funds to reduce their apparent assets. ODSP treats transfers for less than fair market value as an inadequate disposal of assets, and the value can be attributed back to the recipient.
A Practical Guide by Inheritance Size
Every situation is different, but here is a general framework to help frame the conversation with your lawyer:
Inheritance under $40,000
If total non-exempt assets remain below the threshold, there is no immediate ODSP impact. The recipient still has a reporting obligation and should monitor their overall asset picture.
Inheritance $40,001 to $100,000
A Trust Derived from Inheritance can typically shelter the full amount if the $100,000 combined cap has room. RDSP contributions should also be maximized if DTC eligibility exists. Exempt asset purchases can absorb any remaining excess.
Inheritance $100,001 to $300,000
The Trust Derived from Inheritance absorbs the first $100,000. The RDSP (if available) can absorb a further $200,000 over the lifetime. Remaining funds need to be converted into exempt assets. Without DTC eligibility, options above $100,000 are limited – legal advice should be sought immediately upon receiving the inheritance.
Inheritance over $300,000, or where DTC is unavailable
Post-receipt options are almost always insufficient to shelter the full amount. A Henson Trust in the testator’s Will is the only tool with unlimited exempt capacity. At this level, advance planning is not optional – it is essential.
The Bottom Line
If you are creating or updating your estate plan and have a family member who is receiving ODSP, it is important to consider all tools available. Proper planning built into a Will can help protect eligibility for benefits and ensure the inheritance is structured in a way that supports the intended beneficiary.
If an inheritance has already been received without planning in place, there may still be options available, but they are often more limited and time sensitive. In either case, timely legal advice can make a meaningful difference.
Please feel free to reach out if you are considering estate planning or would like to discuss whether a Henson Trust is appropriate in your circumstance.
This blog post was written by Diana Tebby, a member of the Real Estate and Wills and Estates teams. She practices in both our Ottawa and Perth offices and can be reached at 613-369-0384 or at [email protected].
