How to protect your children’s inheritance from themselves 

How to protect your children’s inheritance from themselves

by Jacqui Brauman

You can structure your Will to protect your children’s inheritance from themselves in a number of ways.

Parents sometimes worry that what they’ve earned throughout their life could be fritted away too easily by their children. But sometimes there is also a child who can’t manage money due to mental health, addiction, or being in a controlling relationship – many factors could be at play.

Trusts are the easiest way to provide some level of protection.

Minor’s trust

The basic trust that we use, particularly when children are too young to get their inheritance yet, is called a minor’s trust. So when children are under 18, a minor’s trust is actually set up automatically because they cannot get their inheritance till 18.

The executors that you appoint are very important when you have young children, because they are looking after the money until your kids are 18.

Now, to protect your children’s inheritance from themselves, you may think 18 is too young for children to inherit. So then you can extend that minor’s trust out to when your children are 21 years old, or I prefer 25 years old, because it’s a fairly good average of where most young people have had time to grow some sense of maturity. But some then choose 30 years or more.

So a minor’s trust is a way that you can protect your children’s inheritance from themselves, and then by the age that you do allow them to inherit, hopefully then they’re not easily influenced by others. They’re not going to waste it on cars and party and all those sorts of things. But at the same time, sometimes you can’t help that and they still do.

Protective trust

So what happens when you have a beneficiary who is already an adult and has been somewhat wasteful throughout their life?

They may have a gambling addiction, or they have a drug and alcohol problem.

There is a form of trust called a protective trust that you could use in this sort of situation.

You have to pick someone who’s going to look after the funds for that beneficiary, and they don’t actually get the capital of their inheritance. They don’t get the lump sum, but they’re entitled to have the interest from it.

So they’re entitled to, whether you make it a weekly or a fortnightly or a monthly payment, from the interest that it earns. You can also make a protective trust so that it does include some capital and gradually depletes the capital over time, as well as paying interest. But that depends on how you want to manage that protective trust.

Life interest

Similarly, you could, leave a beneficiary a life interest. Now that usually doesn’t allow them to eat into capital at all. They have interest in a piece of real estate or like a lump sum of cash for life, and they can do what they want with that.

With a life interest, they can take the rent from the property, they could live in the property. If the money is invested, they could take the interest on the earnings, but they can’t eat into the capital.

With this form of trust, you can say who you want the capital to go to after that beneficiary dies. So they have it for life and then once they pass away, it goes down to whom you want as the next option.

A life interest is a way of protecting the inheritance, and maintaining the capital to provide for someone during their life, but then continuing on to another person.

Testamentary discretionary trust

Quite a lot of financial planners and accountants like testamentary discretionary trusts, so you should speak to an advisor if you have someone like that in your life to see whether that’s worthwhile doing in your will.

A testamentary trust is broader than the others already discussed, and is much more flexible.

You’d more often than not have the beneficiary managing their own trust. So you’re not hiding it off from them, you’re not restricting them from using it. However, what it then protects the inheritance from is something happening in their life.

If one of your children were to go bankrupt, or have an insolvency event, or have some kind of potential professional negligence claim against them, or even going through a separation, a testamentary discretionary trust offers a form of protection on their inheritance.

Because your children’s inheritance is in a trust, it’s not in their name. So it’s not readily attackable by the Bankruptcy Court or the Family Court.

Conclusion

So these trusts are something that you can obviously talk to myself or one of my solicitors about as part of the estate planning process, to protect your children’s inheritance from themselves.

You do not have to make a decision about it, necessarily.