Get started on your Application now!RDSPs versus Trusts: Scenario 2 (Janis)
One of the most common questions that we get is, “Should I put my money in an RDSP or a Trust?” The answer is invariably, “It depends.” We started a series of scenarios to bring the comparison to life and to tease out some of the considerations in answering the question. Our first Scenario was that of Nicholas (read about Nicholas’ situation).
Scenario 2: Janis
Janis is 46, lives in downtown Toronto in a small subsidized apartment. Ten years ago, she was riding her bike with some friends when she was hit by a drunk driver. Her life, changed over-night because of a serious brain injury. She lost her job and her friends quickly and has re-gained many of her abilities slowly over time.
Last year Ability Tax Group assisted Janis in qualifying for the Disability Tax Credit, after which Janis opened an RDSP.
Janis recently received about $20,000 from the estate of an aunt. Her question is should I put it all in an RDSP or is there any value in putting some in a trust? To help answer the question we compared two options: (1) put all the money into an RDSP immediately or (2) put some money in an RDSP and some in a trust.
1. Put all the money into an RDSP immediately
If Janis puts all her money in her RDSP in 2011, she will receive the full matching Canada Disability Savings Grant (CDSG) for 2011 immediately as well as her carried forward entitlements for 2008-2010 when they get paid out in 2012. (She’ll also get the Canada Disability Savings Bond but we aren’t going to include it because she will get it in both scenarios.)
Immediate RDSP Contribution $20,000
CDSG 2011 $3,500
CDSG 2008 – 2010 $10,500
Total in RDSP (2012) $34,000
Janis has $34,000 in her RDSP. However, she must wait ten years until 2022 to be able to use any of her money, otherwise a portion of the 14,000 in CDSG from the federal government will be returned to the federal government.
2. Put some of her money in the RDSP and some in a trust
If Janis puts 6,000 in her RDSP immediately, she will maximize her matching Canada Disability Savings Grant(CDSG) for 2008-2011. She pays a lawyer $1,000 to set up a trust and puts the remaining $13,000 in trust.
Immediate RDSP Contribution(2011) $6,000
CDSG 2011 $3,500
CDSG 2008-2010 $10,500
RDSP Subtotal (2012) $20,000
Minus cost of setting up trust (2011) -$1,000
Trust (2012) $13,000
Janis can then contribute $1,500 per year to her RDSP from her trust for the next three years – through her 49th year(2014). This will result in additional CDSGs of 10,500 more into her RDSP.
RDSP (2012) $20,000
Contributions (2012-14) $4,500
CDSG (2012-14) $10,500
RDSP Total (2014) $35,000
Trust (2012) $13,000
Minus RDSP Contributions (2012-14) -$4,500
Trust total (2014) $8,500
Total Assets (2014) $43,500
At the end of 2014, when Janis is 49, she will have $35,000 in her RDSP and 8,500 left in her trust; total assets of $43,500. Equally important, however, she can use the $8,500 in her trust between 2014 and 2024, the period during which using her RDSP will result in some of the CDSG being returned to the federal government.
Conclusion
There are two major benefits to the strategy of using a trust to maximize contributions to the RDSP over time.
1. Maximizing Canada Disability Savings Plans, resulting in more money in her RDSP ($43,500 compared to $34,000).
2. Having some additional money in a trust ($8,500), which can be used as needed between now and the time her RDSP “matures”. This means she has some money if an urgent need arises and she won’t have to trigger a repayment of the holdback amount to access it.
The downside of setting up the trust is the requirement to pay a lawyer and find a financial institution where she can set up a trust account with a small amount of money.
Notes:
The scenarios do not include Canada Disability Savings Bonds or investment income, assuming that they would be relatively equal in both situations.
We have estimated the legal cost of establishing a trust as $1,000. This is an absolute minimum and you may find that the cost is greater with some lawyers.
Janis would be able to continue to receive income Ontario Disability Support Program (ODSP) in both situations.
