Some Basic Estate Planning Considerations for Individuals with Minor Children
Will Trusts for Minor Children: Why are They Necessary?
One of the categories of people we encounter most frequently who do not yet have a will in place, but really should, is parents in young families with minor children. In a past post, we discussed the importance of a will as a way of appointing guardians for one’s minor children in the event one tragically dies before they grow up.
Today, we will discuss a related topic: why one should have a carefully considered will put in place if there is any possibility that one’s estate or life insurance proceeds may benefit someone under the age of 19 (commonly, one’s minor children or grandchildren) on one’s death.
Without a will specifying that assets for minor children are to be held in trust for those children until they reach the age of majority, the personal representative of a deceased’s estate may be obliged to pay the shares of the estate due to those minor children to an entity known as the Public Guardian and Trustee.
Section 153 of the Wills, Estates and Succession Act, SBC 2009, c 13 (“WESA”) provides that if a beneficiary is a minor, and there is no will or the will does not specify that the beneficiary’s share is to be held in trust until the beneficiary reaches the age of majority, then that beneficiary’s share of the estate must be paid to the Public Guardian and Trustee, unless a successful application is made to the court for the appointment of another trustee.
The Public Guardian and Trustee of British Columbia (the “PGT”) is an organization created under the Public Guardian and Trustee Act, RSBC 1996, c 383, tasked with protecting the interests of minors and adults without the capacity to manage their own affairs. In our experience, many clients would prefer assets of their estate destined for minor beneficiaries to be held in trust by their executor or another family member or trusted individual, rather than the PGT. The PGT can be relatively impersonal and is paid management and trustee fees in relation to assets it holds in trust.
When it comes to providing for minor children using a trust under one’s will, there are 3 basic options:
- The will specifies that a minor child’s share of the estate is held in trust by the executor or an independent trustee (the “trustee”) until the child reaches the age of majority (currently 19 in BC). Until then, the trustee can apply the share of the estate to or for the benefit of the child. When the child turns 19, the trustee must pay whatever is left of the child’s share of the estate to the child outright. The trustee has no discretion to retain the funds, regardless of the child’s circumstances. For example, if the child turns 19 and at that time there are concerns surrounding the child’s ability to manage the inheritance (e.g. a substance abuse or gambling problem), or the child is disabled and receiving means-tested benefits, or the child is bankrupt or is facing significant creditors’ claims, the money has to be paid out regardless.
- The will specifies that the share of the estate of a child under the age of X is to be held in trust by the trustee until the child reaches age X. Until the child turns X, the trustee can apply the share of the estate to or for the benefit of the child. The will can also specify that the trustee must pay a portion of the share to the child when the child reaches a specified age less than X (e.g. if X is 30, the will could specify that the child is to receive a percentage or fixed sum from the child’s share at age 25, with the rest continuing to be held in trust for the child until the child reaches 30). When the child turns X, the trustee must pay whatever is left of the share of the estate to the child outright. Again, the trustee has no discretion to retain the funds once the child turns X regardless of the child’s circumstances.
- The will specifies that a child’s share of the estate is held in trust by the trustee. The terms of the trust give the trustee full discretion as to what payments will be made to the child, and the trustee has full discretion to determine amounts and timing of payments. The trustee should also be provided with a carefully drafted Letter of Wishes. This letter is non-binding by necessity, but can be firmly worded, e.g. “It is my firm desire (without binding the trustees) that the trustees should pay Mary’s Fund to my daughter Mary when she turns 25 years of age, unless there are overpowering reasons not to.”  With this approach, the trustee has flexibility to decide whether is it prudent to pay the money out to the child at a given time.
Options 1 and 2 do not provide discretion to withhold funds in a future situation where it would be unhelpful or harmful to place the assets in the hands of the beneficiary child. Options 1 and 2 also do not provide much in the way of creditor protection for the funds. If the child has debts, creditors can just wait until the child turns 19 / age X and can then receive the child’s inheritance in satisfaction of the debts. Contrast this with option 3, whereby the trustee is not obliged to hand the money out at a specified age. In that case, if it would be unhelpful or harmful to give the child the assets at 19 / age X, or if the funds would simply go into the hands of a creditor of the child at that time, the trustee can decline to pay assets out to the child or can fine-tune payments to maximize benefits and minimize harms.
Option 3 can prevent situations where children would spend the money improvidently or in a way that may be dangerous to their wellbeing (e.g. drugs, alcohol) and can help prevent estate assets set aside for the children from being claimed by the children’s creditors. Similarly, if the child is disabled and receiving means-tested benefits, the trustee has discretion to apply the child’s share of the estate to them and for their benefit in a way that preserves the benefits they are receiving from other sources (e.g. government disability supports) that they might lose if they received a large lump sum outright. While a child may not be disabled at the moment, unforeseen diseases and accidents may cause unexpected disabilities down the road. It can be helpful for a trustee to have the ability to exercise discretion in such circumstances.
This kind of planning recognizes that it is impossible to know how things will turn out for one’s minor children, particularly if they lose their parents before growing up. Hopefully, one’s minor children will all grow up and become happy, healthy, sensible, financially stable pillars of the community well before one dies. If that happens, one can update the will, likely to make those wonderful children executors. At the same time, one can adjust one’s estate plan for the new circumstances in other ways. For example, one may remove the discretionary trusts for the now grown and “launched” children and consider updating the wills with new discretionary trust planning to address the sad possibility that one might outlive one’s child resulting in some minor grandchildren benefitting from one’s estate.
Life Insurance and Minor Children
If one has life insurance, there is another question that should be considered. The life insurance should generally not just designate minor children as the beneficiaries (or alternate beneficiaries). If minor children receive a life insurance payout directly, again, the Public Guardian and Trustee may become trustee of the money (and pay themselves out of the money) until the children reach the age of majority. To avoid this outcome, there are 2 main options:
(A) Insurance proceeds pay into the estate. The funds are thus part of the estate (governed by the will), and flow into the trusts set out in the will for the children as part of the residue of the estate.
(B) Insurance proceeds pay into a separate trust (apart from the will). The funds are thus not part of the estate, are not governed by the will, and flow according to the terms of the trust document. The document creating the insurance trust (the “Declaration”) usually parallels the terms of the will. Each child thereby has 2 trusts for them: one created by the will holding their share of the assets of the estate, and one created by the Declaration holding their share of the insurance proceeds. The will and the Declaration usually both contain clauses permitting the trustee of each (possibly the same person wearing two different trustee “hats”) to commingle funds. This can allow the trustee to manage the assets of the two trusts as one pool for administrative efficiency.
Option A has the benefit of relative simplicity. There is only one trust for each child instead of two, and one only needs a will instead of a will and a Declaration.
Option B has the benefit of potential savings down the road. Insurance proceeds paid out to a designated beneficiary do not usually require probate and thus do not require payment of probate fees. Insurance proceeds paid into the estate governed by the will may attract probate fees. If the insurance payout is significant, the associated probate fees may be significant (probate fees on $1 million are approximately $13.5 thousand). Additionally, funds that pass under a will are subject to will variation claims. Assets passing outside of a will (e.g. through a stand-alone insurance trust as in option B) generally have some insulation from both will variation claims and probate fees.
Individuals whose estate may pass to minor beneficiaries should carefully consider whether they would prefer option 1, 2, or 3. Such individuals who have life insurance in place should also think about whether they would prefer option A or B.
If you have any questions about estate planning for minor beneficiaries, or any other estate planning or administration matters, we can be reached here.
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