Leaving A Bequest To A Minor Child
It is very common for a testator to want to give gifts to their children and grandchildren in a will. In fact, it is often the case that the testator’s children or grandchildren are the main beneficiaries of their estate. This can give rise to issues when the testator dies while the child or grandchild is still a minor, as it is not possible in Australia to give an absolute gift in a will to a minor child. This article explores the implications for estate planning and options for leaving a bequest to a minor child.
Leaving A Bequest To A Minor Child
There are options for a testator to provide for a minor under the age of eighteen, each with their own inherent benefits and disadvantages. Fundamentally, the purpose of each of these options is to allow the testator to make provision in the will for someone to act as caretaker of the asset until the child can take responsibility.
Option 1: The Executor Holds The Asset In Trust
The testator can include a clause in their will instructing the executor to hold the asset in trust until the child reaches the age of eighteen. The executor would have an ongoing responsibility to deal with the asset and act promptly to deliver the asset at the appropriate time.
There are tax implications for this approach so the executor would need to obtain specialist advice to manage the asset. If the bequest is in the form of funds then the executor will typically deposit the money in an interest accruing bank account. Alternatively, if the amount is considerable and the minor is not going to reach the age of eighteen for several years, the executor may decide to invest the cash. This approach confers significant responsibility on the executor to ensure that the investment is safe and preserves the capital.
If the bequest is for several minor children (for example, a clause that says “I leave to my three grandchildren…”), then the executor will have to set up a separate bank account for each beneficiary. It is not practical for a bequest to multiple children to be held in one account, as each beneficiary will reach maturity at a different time.
The option to have the executor hold on to the bequest is usually used when the minor will soon turn eighteen. If the testator intends that the beneficiary receive their bequest at an older age, there are other options that may be more suitable.
The Parent Or Guardian Holds The Asset
Another option is for the executor to pass the asset to the parent or guardian of the child on the proviso that the asset will be passed to the child when appropriate. This is a more typical approach if the bequest is modest, as the executor does not have to continue to manage the administration of a small bequest. Of course, there are risks associated with this approach. It relies on the parent properly managing the gift, and there is a risk that the parent or guardian will not actually pass the asset or funds on to the child. If the child is still very young, the danger is that the gift will be lost or depleted by the time the child is ready to receive their bequest.
A Trustee Holds The Asset
Where the bequest is to several minor children and the value is considerable, the testator may create a discretionary trust in their will. In this way, the testator can choose to have the asset held in trust until such time as the trustee considers that the beneficiary is sufficiently mature to manage the asset. A trustee can hold all of a bequest in a single trust to benefit multiple young children. The trustee will need to engage professional assistance to manage the tax implications of this type of trust.
A major advantage of this type of trust is that the trustee has the discretion to dispense income or capital from the trust at any time. In addition, the trustee does not have to make equal distribution of income or capital amongst the beneficiaries, which may be an advantage if some of the children are in greater need than others. The trustee also has the authority to decide when the beneficiary is mature enough to receive the capital of the trust, accounting not only for chronological maturity but also other factors that may impact on the capacity of any beneficiary to manage their inheritance (such as substance abuse).
The choice of trustee is crucial as the person is likely to be managing the trust for a long period of time and making quite subjective decisions about the distribution of the trust. A testator can attach instructions to guide the trustee to manage the trust, including when the children should receive a share, and in what percentage, but these guidelines are not legally binding upon the trustee.
Many people consider leaving a bequest to a minor child in their will. You do have to consider the best approach to making a gift given the specific circumstances. The contested wills team at Armstrong Legal can advise you on the options so that you can make a thoughtful and legally binding gift to your minor child or grandchild. Call 1300 038 223 today to make an appointment or talk through your testamentary options.