How to protect your child’s inheritance

It’s wonderful to be able to leave children an inheritance, but you want to make sure that the wealth you’ve worked so hard to build and set aside for their future is protected, regardless of where life takes them.  Many parents are concerned with the ability of their child to manage a large amount of money, and other concerns may stem from the possibility of a failed relationship.

There are certain steps you can take to help protect your child’s inheritance. Let’s take a closer look at a couple of the most important.

Consider a Trust 

If your children are young, or you are concerned about their ability to manage a large inheritance, consider writing your will such that the assets are left to a trust established for your child’s benefit rather than to the child outright.

What is a trust?

A trust is a legal arrangement where a trustee holds legal title to the trust property for the benefit of the trust beneficiaries. The trustee has the power to deal with the assets and to distribute income and capital of the trust to beneficiaries in accordance with the terms of the trust.

How should I structure the trust

When you are creating a trust in your will, there are several factors to consider:

  • For children under the age of about 30, most parents set up non-discretionary trusts, meaning that the trustees of the trust must follow specific instructions, usually transferring the capital to the children in stages (for example, one quarter of the capital at age 21, half at age 25, and the remainder at age 30 
  •  If the child is older, and there are concerns about the state of the child’s marriage or their ability to manage large sums of money, then the parent may set out a different distribution scheme, or may make the trust discretionary, meaning that it is up to the trustee to decide when and how to distribute the capital  
  • In many cases the trustee of the trust is the child, but where there are significant concerns about the child’s ability to manage large sums, an independent trustee may be appointed instead.
  • In some cases, if the amount of wealth is significant, the use of a trust may allow your family to income split with low-income beneficiaries (i.e. grandchildren).  Speak to an estates lawyer or notary to ensure that your will is properly structured.

Communication is key

Having frank conversations with your child about tough topics like death, divorce and inheritance can be uncomfortable. However, keeping the lines of communication open with your child about their inheritance is really the best way to help protect it, and their future.  If your children are mature enough to broach the subject with them, consider speaking to them about your concerns.   

Discuss Joint Ownership

Relationship breakdown can be a tricky subject to address, especially when a child is younger or in the early stages of a happy romance. However, while you can’t protect your child from the pain of a separation, you can do your best to protect their inheritance and future well-being.  For example, you may want to mention to your child that in order protect an inheritance or gift, he or she should invest it in his or her name alone, and not add his or her spouse as a joint owner.

Keep in mind that family law differs by province

Laws are different across the country, and because they can always change in the future, you should speak to a legal advisor licensed to practice in your jurisdiction to discuss the optimal method for protecting the assets; if your children are older, they should also speak to a legal advisor if they are concerned about the implications of a relationship breakdown.    Generally, the best way to protect specific assets is for the spouses to enter into a form of domestic contract (sometimes referred to as a marriage contract, pre-nuptial agreement or cohabitation agreement). However, some children (and/or their fiancés or spouses) may not be open to this suggestion. Finally, it is also important to keep in mind that even if there is a contract in place, if the parties do things that nullify the contract (e.g. add their spouse as a joint owner of an otherwise exempt asset or use the inheritance to purchase family assets) then the contract may be of limited use. 

As you can see, there are many considerations when planning to preserve your wealth for future generations, and you may have more questions. For more information, speak to your IG Consultant and ask them for a copy of our white paper “Protecting Your Child’s Inheritance”.