What happens if the beneficiary of a Will is a child? Poppy Cooke, Assistant Solicitor, explains the options available, and the potential implications for the beneficiaries.
A beneficiary of an estate can be a minor. However when someone is under 18, they are seen to lack the capacity to inherit a gift under a Will, and therefore are not entitled to receive or accept the gift or share of estate until they reach the age of 18. This means that if they have been left something in someone’s Will, there must be arrangements to look after the inheritance on their behalf until they are old enough to receive it themselves.
When someone writes their Will, they will name a trustee or trustees to administer their estate and property, including any inheritance administered to minor children. When someone has left a gift to a minor child in a Will, the asset will be placed into a trust in the care of the appointed trustees until the minor child or children are at the age specified in the Will. This does not need to be 18 years old if the person writing their Will believes that they may not be mature enough to look after a substantial sum of money at that age. Instead, they can choose any age they wish – most often 21 or 25 years old.
Setting up a Trust
The person writing their Will will need to consider what type of trust to set up. If a trust has not been set up for a minor child, or there is no Will, then an automatic trust will be put into place until they are aged 18. This means that your executor and trustee will be responsible for looking after the funds until the minor child or children reaches 18, at which point they will be given the monies.
They could choose to simply do the above and have the money held by the trustee until the age at which the children are to inherit, at which point it would be paid over to them. This is called a ‘bare trust’. If the beneficiary survives the person who has left them an inheritance, but does not reach the age of 18 then the inheritance that they would have received would pass by the minor beneficiary’s estate, as they have obtained the interest on the testator’s death.
Age Contingent Gifts
However, if someone has stipulated an age for a minor to receive a gift, as above possibly 21 or 25, the beneficiary’s entitlement is contingent on them reaching that age. Therefore, if they do not live until the age set out then the share or asset would pass to an alternative beneficiary, or into the testator’s residuary estate. The idea is that the trustees can distribute money to the children before they attain the specified age at their discretion, but when the child attains the required age, they inherit the remainder of the balance of their share outright.
Alternatively, a minor child’s inheritance could be left to the trustees in a discretionary trust. This gives the trustees the absolute discretion and flexibility to apply trust monies and to invest the trust funds and also to pay money out for any expenses that the child may have, such as education, to buy a car or towards a property. The Trustees have the power to forward the capital and income from the trust at their entire discretion to any one or more of the beneficiaries as and when they feel appropriate.
The Will can include the powers that someone has given to the trustees and details such as whether they are to be liable for any losses. However, when writing a discretionary trust into a Will, it is advised to write a Letter of Wishes to your trustees, to give them guidance as to how the money is to be invested and spent on minor children.
Different trust structures attract different tax liabilities, so it is always recommended that you seek independent legal advice to ensure that the trust chosen will be the most tax efficient to the beneficiaries and the estate.
A trust made by parents where property, for example, is held in trust until children are aged between 18 and 25 will attract some ‘exit charges’ for funds left in the trust beyond the age of 18, along with Capital Gains Tax, although holdover relief may be available, meaning the child will not have to pay the tax until they sell the asset.
A bare trust, where money belongs to the minor but is not available to them until they are 18 will not attract exit charges or Capital Gains Tax, but with this type of trust the minor has the right to the monies at 18 years old, whether they are mature enough to manage it or not.
It is possible to set up a trust that is not discretionary and where the child does not have a right to money until a specified age is reached, but Capital Gains Tax will be payable and holdover relief will not be available.
It may be that when writing a Will, when you die you would be happy for the Trust Fund to be paid to their parent or guardian. The person writing their Will can stipulate that they give the executors and trustees the option to make the gift to the child’s parent or guardian. However, this does leave the risk that the minor beneficiary may never benefit from the gift if their parent or guardian were to use the funds. However, it may be that you would be concerned about a parent or guardian receiving the Trust Fund and you would prefer your trustees to look after the monies. It is always recommended when writing a Will that you appoint executors and trustees whom you trust wholly, so in the event of a minor inheriting any funds, the funds can be managed by someone you know will act in their best interests and in line with your wishes.
The Trustee Act 1925 provides that in certain circumstances, capital from a Trust Fund may be advanced for the benefit, maintenance and education of a minor beneficiary before they reach the age of entitlement. There are also statutory powers to advance income in similar circumstances. Your Will can be the tool in which you specify these powers.