Bequests to Minor Children
It is very common for the main beneficiaries of a will to be the testator’s children and grandchildren. When the testator dies while the child is still a minor, this causes complications, as it is not possible in Australia to will an absolute gift to a minor child. This article outlines the implications of this for estate planning and options for leaving bequests to minor children.
Leaving Bequests To Minor Children
There are several ways for a testator to provide for minor children, each with their benefits and disadvantages. Each of these options allows the testator to make provision in their will for another person to act as caretaker of the asset until the child reaches the age of 18 and can take responsibility.
Option 1: Executor Holds The Asset In Trust For The Minor Child
If a testator anticipates passing away before their children reach the age of 18, they can include a clause in their will instructing the executor to hold the asset in trust until the child reaches 18. The executor in this situation will have an ongoing responsibility to look after the asset and act promptly to deliver it at the appropriate time.
There are tax implications for this approach so the executor would need to seek specialist advice about managing the asset. If the bequest is of funds then the executor will typically deposit it in an interest accruing bank account. Alternatively, if the amount is large and the minor is not going to turn 18 for a number of years, the executor may decide to invest the money. This means taking significant responsibility to ensure that the investment is safe.
If the bequest is for the benefit of several minor children, then the executor will need to set up a separate bank account for each child. It is not practical to hold a bequest to multiple children in a single account, as each beneficiary will reach majority at a different time.
The executor will generally hold onto the bequest when the minor will soon turn 18. If the testator intends the beneficiary to receive the bequest at an older age, there are other options that may be preferable.
The Parent Or Guardian Holds The Asset
Another approach to dealing with a bequest to minor children is for the executor to pass the asset to the child’s parent or guardian to be passed to the child when appropriate. This approach is more common where the bequest is modest. This makes sense as the executor then does not have to manage the administration of a small bequest on an ongoing basis. Of course, there are risks associated with this approach, which relies on the parent properly managing the gift, and the parent may not actually pass the asset on to the child when they reach majority. If the child is still very young, there is a danger is that the gift may be lost or depleted by the time they are old enough to inherit.
A Trustee Holds The Asset
Where the bequest is made to several minor children and the value is considerable, the testator may create a discretionary trust in the will. In this way, the testator can choose to have the asset held until such time as the trustee considers that the beneficiary is mature enough to manage the asset. A trustee can hold all of a bequest in a single trust for the benefit of multiple minor children. The trustee will need professional assistance in managing the tax implications of this kind of trust.
A major advantage of this kind of trust is that the trustee has the discretion to pay out income or capital from the trust at any time. In addition, the trustee is not required to make equal distribution of income or capital amongst the beneficiaries. The trustee is also authorised to decide when the child is mature enough to receive the capital, accounting not only for their numerical age but also other factors that may impact their capacity to manage their inheritance (such as substance abuse issues).
The choice of trustee is crucial as they are likely to be managing the trust for a long time and making quite subjective decisions about its distribution. A testator can attach instructions to help the trustee to manage the trust, including when the children should receive a share, and what percentage they should receive, but these guidelines do not legally bind the trustee.
Many people leave bequests to minor children in their will. A person considering doing so should consider the best approach to making a gift to a minor in their specific circumstances. If you require legal advice or representation in any legal matter, please contact Go To Court Lawyers.