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Wednesday, September 16, 2009

At what age should children inherit money?

Today I met with clients who wanted to discuss a very common question, that of the age at which their children should inherit money should their parents both pass away.

Individuals cannot inherit money if they are under the age of majority. Therefore if parents state in their Wills that their children may inherit at an earlier age, the clause would be invalid. The child's money would be held in trust until his or her 18th birthday (or 19th in some provinces).

Parents can, however, provide that the child inherits at a later age. Over the years I've talked to hundreds of parents about this issue, and they are almost unanimous in the opinion that 18 or 19 years old is too young to inherit money. The larger the potential share for the children, the more concerned the parents become about how the children will handle a sudden windfall.

The concern is sometimes that the child will "blow" the money by extravance, or that the children will lose motivation to work, study or otherwise apply themselves in life. In other cases, the parents fear that the child might be taken advantage of financially. The purpose of the trust, therefore, is to protect the children and their inheritance. The challenge is to balance that protection against "ruling from the grave".

The solution is to set up a trust for the children by stating the terms of the trust in the Will. After the parents have passed away, each child's share is invested. The lawyer will draft the trust to meet each client's needs and goals. A popular idea is that a child will receive a portion of the money in trust at age 18, another share at age 21 and the balance at age 25. Later ages can be chosen if the parents want that.

The clients I met today liked the idea of giving their children half of their inheritance immediately upon the parents' death and the other half five years later. Some parents like the idea of spreading the trust equally over ten years with an annual payment.

When this kind of trust is set up, the lawyer will ask the parents whether the trust should allow encroachments. Encroaching on a trust means taking some money out to be paid to the child or on behalf of the child on an as-needed basis. In other words, if money is needed for medical treatment or university fees etc, the trustee of the trust can decide to allow the payment even though it would be over and above the scheduled payments from the trust.

When you see a lawyer to give instructions for a Will, you do not need to have all of this figured out before you go. You should choose a lawyer with a specialty in Wills and Estates so that you can ask for ideas and discuss the various plans before deciding. You know you're working with an experienced, creative Wills lawyer if you find yourself thinking "I hadn't thought of that" at least once during your meeting!

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