Parents are commonly faced with the decision on how to leave gifts to children in their wills. Parents have a difficult balancing act between ensuring their child receives some financial benefit while ensuring their child has the maturity to deal with the inheritance appropriately.
There are three common options for leaving a gift to a child:
- the executor of the will holds the gift on trust;
- a parent or guardian of the child holds onto the gift until the child reaches the desired age; or
- a trust is created to hold the gift in trust.
1. Executor holding onto the gift in trust
The will maker would instruct the executor to hold onto the gift for the benefit of the child until the child reaches the desired age (vesting age) the will maker elects. The executor will have legal fiduciary obligations to deal with the gift in the interest of the child until the child meets the conditions to become entitled to use it themselves.
Unless the will maker leaves specific instructions on how the executor must deal with the gift, the executor will have an ongoing responsibility to deal with the gift with the interest of the child in mind. For example, if there is a substantial period of time until the child becomes entitled to receive a monetary inheritance, the executor may choose to invest the inheritance.
2. Parent or Guardian holds on to the asset
The will maker will leave the gift to a parent or guardian on the agreement that that parent or guardian will give it to the child once they reach the desired age. This is commonly used when the gift is a relatively small one (for example, your car or a small amount of money).
The greatest risk to this method is the lack of a trustee relationship. The fact it is only an agreement between the will maker and a parent or guardian means there is no legal obligation placed onto the parent or guardian to actually deal with it in a way that would benefit the child. The will maker would be placing a large amount of trust that the parent or guardian:
- will actually give the gift to the child; and
- will not use the gift in a way that it may diminish the value of the gift (e.g. gifting a certain amount of money to a child and the parent using the remainder of the money for themselves).
3. Creating a Trust
In this situation, a trust would be created to deal with the gift. It is different to the first method as a separate body would be created to manage and deal with the gift rather than the executor making the decision on how to deal with it. The trust deed would set out the provisions on who would be entitled to receive the income of the trust, how the gift must be used on behalf of the receiver and what conditions the receiver must meet in order to become entitled and deal with the gift themselves.
Creating a trust is best suited for a situation where the child would receive a gift that is highly significant in value, as the creator of the trust can impose their own conditions on how the gift must be dealt with until the child reaches the ability to manage it themselves. But it does attract tax liability that a will maker should consider before creating one and the will maker will have to appoint a trustee they believe will make appropriate decisions about distributing the gift.
At what age can a child become entitled to receive a benefit?
A will should mention what age a person should reach in order to become entitled to receive their inheritance this is also known as the vesting age. Failure to clarify a minimum age in your will may result in ongoing disputes between executors and potential beneficiaries which will ultimately be at your estate’s expense. A minimum age is typically 18 years old but is commonly increased to between 21 to 25 years old so the child can become more mature in handling financial assets.
If you intend to increase the age of entitlement to over 18 years of age, it is best for the clause to:
- make the entitlement to the gift conditional upon the child reaching the desired age;
- provide what will happen to the gift until the child reaches the desired age (e.g. the executor must hold onto the gift on trust for the child and must not transfer the gift to anyone else); and
- advise what will happen to the gift if the child does not meet the desired age in the unfortunate event they pass away.
By providing conditions on what will happen in the event the child does not each the desired age provides the court with clarity on what your wishes were surrounding leaving a gift to a child.
If you have any questions or require assistance with drafting or reviewing your will in Queensland, please contact the property team at My Property Protect for more information.
Kayleigh Swift, Associate
Kayleigh Swift is an associate in our Commercial and Property team who assists with Employment Law matters. With a high level of experience in commercial and retail leasing, voluntary and involuntary purchase and sale acquisitions, property development and employee relations, Kayleigh provides practical advice to ensure smooth business transactions.
Chloe Skubis, Lawyer
Chloe Skubis is a Lawyer in our Property team who assists with various conveyancing transactions. Chloe is very experienced in residential conveyancing and is a problem solver. She always provides efficient service to all her clients.