In a perfect world, Parents want to protect and support all children equally, but what happens if there is one financially irresponsible child, or when it goes one step further and that child is a gambler, or has a drug or alcohol problem. You will probably want to make sure that your child does not squander your hard-earned estate when they inherit it. You may also be worried about their choice of partner, and whether they may face a separation in the future in which their inheritance could be divided with their ex.
Cutting them out of your Will is really not an option, because their financial needs may mean they have a strong claim to contest your Will. There are a couple of different trusts that you can consider:
Minor’s trust
If your children are under the age of 18 when you die, their inheritance is automatically held in a minor’s trust until they are 18 years old (no longer minors).
You can extend the age of a minor’s trust to 21, 25, 30 or 40 (or whatever age you want) in the hope that your wayward child has grown out of his or her irresponsible ways. Someone else will be in control of their inheritance (the executors) until they reach the specified age, and their inheritance can only be used at the discretion of those trustees.
But this offers little protection if they have not changed their ways by the time they reach the specified age. So what are the other alternatives?
Protective trust
Protective trusts have been legislated for, and are a bit old-fashioned. How it works is that you leave the inheritance to your wayward child in a protective trust. Only the income earned from their inheritance can be paid to them, and the whole of the capital is protected. It prevents the wayward child from spending a capital lump sum. After your wayward child dies, the capital part of the inheritance can be passed to someone else of your choosing (maybe your grandchildren, or maybe another child).
These were set up a lot in the 1950s and 1960s, but there has been many that have been contested and set aside, so the child ends up with their inheritance anyway. And there are other problems of trying to forfeit the interest in the protective trust, and when the protective trust ends if not on death of the child. There is also the issue that any income from the protective trust could still be available to your child’s creditors if your child became bankrupt. So whilst the capital is protected, the income is not.
So what is the other alternative?
Discretionary trust
A testamentary discretionary trust where the vulnerable beneficiary (your wayward child) is not the only beneficiary, and has no control, and any distribution to them is at the complete discretion of an independent trustee (or the trustees could be a group of your other children, but this can cause a greater divide in the family). Or the vulnerable beneficiary could be made one of a number of directors of a corporate trustee, so there must be a majority agree before a decision can be made.
A discretionary trust deals with the issue of the wayward child having control. It also overcomes all protection issues for the capital and the income. The wayward child’s interest in the trust is not worth anything, so they cannot sell it for value. So if you have a child who has problems, the solution is not to leave them out, but to work out a way of protecting them and your hard-earned estate. You need to think about your objectives
For further information contact our Accredited Specialist Jacqueline Brauman.
