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Thursday, March 8, 2012

Can my will allow funds to go to guardian of my children?

This reader has asked a very good question about helping a guardian with the cost of raising minor children in the event that the child's parents have passed away. I know a lot of other parents wonder about the logistics of getting funds to the guardian too, so I think many of you will find this post interesting.

Here's the question:

"I'm preparing my will. I have 2 minor children. I've appointed a guardian for the 2 kids, in the event that my wife & I pass away. A trust will be set up for the kids. How do I specify or bequest funds to the guardian to help with the cost of raising my 2 kids? I assume the guardian cannot withdraw funds from the trust until kids reach legal age."

One of the real beauties of testamentary trusts (i.e. trusts that are set up in your will) is that you can tailor them to meet your needs. You will be able to arrange for your guardian to receive funds if that's what you want. May I add that I hope you are not trying to draft something as important as your children's financial futures by yourself. Ask an experienced lawyer for help with the drafting to avoid your kid's inheritances ending up as court fees.

First, let me clear up an error. You said that you assume the guardian can't withdraw funds until the kids reach legal age. That's not the case. The kids can't inherit until they are of legal age, but that certainly doesn't stop you from channeling funds to a guardian to help pay for their expenses.

Keep in mind that normally under a will the guardian of the children and the trustee of the children's money are two different people. The money is held in trust NOT by the guardian but by the executor/trustee. Look at your will. It gives powers to the trustee and places restrictions on the trustee in anticipation of the trustee safeguarding the children's inheritances.

There are three general ways in which guardians usually receive money under a testamentary trust. You can use any of them or all of them depending on your situation.

The first is to state in your will that a certain amount per month will be paid to the guardian on a regular basis. You would choose the amount by balancing out the amount the child will inherit, how long the trust is to exist etc. You would state the amount in the will. The money is to be used for the child's clothing, food, medications, and the child's share of household expenses.

The second is to provide the guardian with a lump sum of money at the time he or she takes over as guardian.The money would be used for something like renovating the guardian's home to make room for your children, or buying a larger vehicle to accommodate your children.

The third is to provide an encroachment on an as-needed basis on the funds held in trust. You can state the kind of thing that is to be considered, such as education expenses or living expenses. The guardian would have to ask the trustee for the money on behalf of the child, as the trustee is the one safeguarding the funds.

While considering this question, check your life insurance policies to see who you have named as beneficiaries. If you have named one or more of your children, the money is not going to be held by your executor. It will be held by the insurance company until the child reaches legal age, and paid all at once on the 18th birthday (or 19 in some provinces). If you want insurance money to be controlled by your executor on the same terms as the rest of your estate, you should look into naming the estate as the beneficiary.

I've boiled down some fairly complicated concepts to the bare bones here. I caution you again against trying to draft a trust on your own. While testamentary trusts are flexible, there are still a lot of rules to be followed in order to create a valid trust. I strongly urge you to talk this over in detail with an estate-planning lawyer.

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