The RDSP, Contractual Capacity and Estate Planning
Adults who are deemed to lack contractual capacity, and family members assisting them, face the challenge of identifying an individual who is legally authorized to act as holder of the RDSP. I’ve previously outlined this issue here. Family members who have contributed to RDSPs on their behalf are now beginning to ask the question, “What will happen to the assets if the beneficiary dies before using them up?” It’s an interesting dilemma as many of those deemed not to have contractual capacity are not currently able to write a Will.
First, what happens to the assets in an RDSP when a beneficiary passes away? Upon death, any holdback amount in the RDSP is repayable to the federal government. The holdback amount is any amount received from the Canada Disability Savings Program (Grant or Bond) in the ten years preceding the date of the beneficiary’s death. In many cases, however, there will be additional assets: personal contributions, investment income and government contributions held longer than ten years. Once the holdback amount is returned to the federal government, the RDSP is collapsed. This means paying tax on the taxable portion – the investment income and remaining federal government contributions. The remainder will become part of the beneficiary’s estate. In some cases, especially early in the plan, this amount will only be a few thousand dollars but eventually it could be hundreds of thousands of dollars.
If the person does not have a Will, distribution of the estate will be dealt with through the provincial laws dealing with intestacy (passing away without a Will). Suffice it to say, in most cases it will require engaging a lawyer, paying court costs and is an option recommended by NO ONE. These might be minimal where the remaining family members are able to act in unison but we know that as the size of the estate increases the probability of unanimity decreases.
Consequently, the inability of some RDSP beneficiaries to execute a Will poses a problem.
What is the solution?
Article 5 of the United Nations Convention on the Rights of Persons with Disabilities provides overarching direction. The signatories, one of which is Canada, recognize that “all persons are equal before and under the law and are entitled without any discrimination to the equal protection and equal benefit of the law.” The Convention suggests that laws which exclude people who don’t have legal capacity will need to be reformed. The shape of future reforms is not yet clear.
Options for Reform
1. Reform provincial laws which exclude people without legal capacity from being able to exercise their wishes in estate planning
This is an expansive piece of legal work – 13 jurisdictions changing the paradigm upon which years of precedent have been built. Furthermore, how to provide access to people without legal capacity is not clear. Few people would argue against all people being able to exercise their wishes. The problem that must be dealt with in doing so, however, is twofold: how do we enable people to express their wishes while at the same time protecting them from unscrupulous people who might take advantage of them. Many people in the disability community think that the solution lies in supported decision-making. Currently, B.C.’s Representation Agreement Act sets the gold standard in legislation that implements principles of supported decision making. Of issue remains the fact that thousands of people do not have trusted, unpaid people in their lives to assist them in decision-making.
2. Enable the appointment of a designated beneficiary to the RDSP and lower the capacity threshold for people to meet before exercising this the option
Enabling an RDSP Beneficiary to name a designated beneficiary who will receive the proceeds of the RDSP should not be a complicated amendment to the Income Tax Act. RRSPs and RRIFs, for example, both permit the naming of a designated beneficiary. The more complex element is assuring an unbiased appointment of designated beneficiary. Establishing a lower threshold for capacity would include a proportion of the people who are currently excluded, but still requires a test for capacity. Some people will continue to be excluded.
3. Enable contributors to RDSPs to have a “reversionary interest” in RDSPs
In most cases there will be three major contributors to RDSPs: the beneficiary, the federal government and family or close friends. Rather than the proceeds of the RDSP being distributed through the beneficiary’s estate, an alternative approach would be to return any amounts originally contributed to RDSPs to their respective contributors. A key consideration would be distribution of the investment income, although that too could be redistributed to contributors.
More importantly, recognizing a reversionary interest would mean that the asset no longer truly belongs to the beneficiary. What currently are gifts would become something much more like amounts held in trust. While the federal government might like this – and it might prompt easing the current rules with respect to the holdback amount – and families might like this as they would be better able to determine where residual assets end up, it dramatically eliminates what is currently a very positive aspect of the plan: people with disabilities are accumulating wealth.
4. Enable the use of supported decision making for RDSPs and include the ability to appoint a designated beneficiary to the authorities of a plan holder
The problem of excluding some people (those without contractual capacity) from acting as holder needs to be solved, as it is deterring people from opening RDSPs. While I am by no means suggesting that I have the solution to this issue, it would seem that the principles for solving this question are within the United Nations Convention on the Rights of Persons with Disabilities and involves a shift in paradigm as outlined by Bach and Kerzner (2010):
“The question can no longer be: Does a person have the mental capacity to exercise their legal capacity? In other words, mental capacity can no longer serve as a proxy for legal capacity. Rather, the question is: What types of supports are required for the person to exercise his or her legal capacity?”
The problem thus shifts from assessing capacity to providing appropriate supports. The framework for appropriate supports needs to include a number of elements:
- A relationship characterized by trust
- A duty to provide relevant information in an accessible manner
- A duty to make every effort to understand the person’s wishes
- A duty to comply with the person’s wishes, and where wishes cannot be ascertained,
- A duty to act in the best interests of the person.
It appears that if we are to begin to understand and adhere to the United Nations Convention on the Rights of Persons with disabilities, the Registered Disability Savings Plan, a savings vehicle designed for people with disabilities provides fertile ground for exploration.
Hence, although option 1 may represent the actual “end game” in the implementation of the Convention, option 4 makes more sense as a starting point for two reasons: one, that solving the issue with respect to the RDSP will enable many more people to utilize the plan and, two, the RDSP provides a delimited, relevant and compelling arena within which to innovate.