A Costly Gift: What the Damgaard Case Teaches Us About Estate Planning for a Loved One With a Disability

For families with a loved one receiving disability assistance, an inheritance can have unintended and damaging consequences. A well-intentioned gift can disrupt eligibility for essential government benefits, often outweighing any short-term financial gain. Just as important, the courts may be unwilling to correct these outcomes after the fact.

The recent BC Supreme Court decision in Damgaard v. Damgaard Estate, 2025 BCSC 208, underscores the importance of careful, proactive estate planning where a beneficiary is receiving disability assistance as a Person with Disabilities (PWD).

The Damgaard Case: Equal Shares, Unequal Outcomes

In Damgaard, the testator divided her estate, valued at approximately $5.4 million, equally among her three adult children under her Will. One of her daughters who had PWD status resided in social housing and relied on disability assistance, stood to lose those supports following her outright inheritance, though the Court noted it was not definitively established that she would lose her housing supports.

She brought a wills variation claim under section 60 of the Wills, Estates and Succession Act (WESA). Importantly, her challenge was not about the amount she received, which was the same as her siblings, but rather about the manner in which it was provided. She argued that an outright gift, rather than a discretionary Henson Trust, did not make adequate provision for her maintenance and support given her disability and resulting loss of benefits.

The Court dismissed the claim, noting several factors: (1) she received an equal share; (2) the inheritance was substantial; (3) the evidence that she would necessarily lose housing or supports was limited; and (4) the testator did not breach her moral obligations to her daughter at the time of her death.

Why This Matters

The Damgaard decision is a stark reminder that the court will not rewrite a Will to shield a beneficiary from harmful consequences stemming from poor structuring, unless it amounts to a failure to meet the testator’s legal and moral obligations to the claimant. Families planning for a loved one with PWD status must act strategically to avoid unintentionally jeopardizing essential supports.

Giving a loved one with a disability immediate, unrestricted access to a large sum of money can also expose them to undue influence, financial mismanagement, or exploitation. A carefully drafted trust can offer an effective safeguard.

This concern is not limited to inheritances under a Will. Similar issues can arise where an individual with PWD status is designated as a beneficiary of a life insurance policy, pension, RRSP, RRIF, or TFSA, and receives those proceeds outright. In such cases, thoughtful planning is equally important to avoid disruption of disability assistance.

Trusts Created by a Will (Testamentary Trusts)

One of the best ways to protect a loved one with PWD status is through a discretionary trust created in your Will, commonly referred to as a Henson Trust. Because the beneficiary cannot demand payments, the trust assets are not considered their personal assets for disability assistance eligibility.

If properly structured and meeting certain criteria, a testamentary discretionary trust may also qualify as a Qualifying Disability Trust (QDT) under the Income Tax Act, offering a significant tax advantage by allowing it to be taxed at graduated rates, rather than the top marginal rate that typically applies to trusts. Importantly, a beneficiary can only benefit from one QDT at a time, so coordination among family members is key for maximum tax efficiency.

Trusts Created While You Are Alive (Inter Vivos Trusts)

Family members can also settle a discretionary trust during their lifetime to protect PWD eligibility for a loved one. Like a testamentary trust created under a Will, a discretionary inter vivos trust is not considered an asset of the beneficiary, even if funded gradually.

By contrast, non‑discretionary inter vivos trusts, which issue scheduled or guaranteed payments must adhere to a $200,000 lifetime capital contribution limit for the trust to be considered exempt under the Employment and Assistance for Persons with Disabilities Regulation. Notably, any growth on the invested funds is exempt; only principal contributions are counted. Exceeding the $200,000 cap typically means the trust becomes a countable asset, threatening ongoing eligibility for benefits.

While inter vivos trusts cannot qualify as QDTs, a preferred beneficiary election may still allow tax attribution of income to the disabled beneficiary who qualifies for the Disability Tax Credit (DTC), even if that income is retained in the trust and not distributed.

Due to the costs of establishing and administering a trust, this option should only be considered where the value of the capital intended for the beneficiary is expected to exceed a meaningful threshold.

Key Takeaways for Families

The Damgaard decision reinforces a core principle in disability-focused estate planning: equal treatment does not always produce equitable outcomes. For beneficiaries with PWD status, even a modest inheritance received outright can have unintended consequences, including the loss of essential support.

If you are planning for a loved one with a disability, consider the following:

• Update your Will to include a discretionary Henson Trust.
• Appoint a skilled and impartial trustee to manage funds and avoid potential conflicts.
• Consider inter vivos trusts where appropriate.
• Coordinate planning across family members for consistency and tax optimization.

Proactive planning is almost always best. If a loved one has already received or is about to receive an outright inheritance, options may still be available, but timing is critical. Seeking legal advice promptly can help preserve essential benefits and long-term financial well-being.