Estate Planning for Minor Children

Some Basic Estate Planning Considerations for Individuals with Minor Children

Will Trusts for Minor Children: Why are They Necessary?

Without a will specifying that assets destined for minors are to be held in trust for those minors 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 minors 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 minors (e.g. one’s minor children or grandchildren) using a trust under one’s will, there are three basic options:

1. The will specifies that a minor’s share of the estate is held in trust by the executor or an independent trustee (the “trustee”) until the minor reaches the age of majority (currently nineteen in BC). Until then, the trustee can apply the share of the estate to or for the minor's benefit. When the minor beneficiary turns nineteen, the trustee must pay whatever is left of the beneficiary’s share of the estate to the beneficiary outright. The trustee has no discretion to retain the funds, regardless of the beneficiary’s circumstances. For example, if the beneficiary turns nineteen and at that time there are concerns surrounding the beneficiary’s ability to manage the inheritance (e.g. a substance abuse or gambling problem), or the beneficiary is disabled and receiving means-tested benefits, or the beneficiary is bankrupt or is facing significant creditors’ claims, the money has to be paid out regardless.
2. The will specifies that the share of the estate of a beneficiary under the age of X is to be held in trust by the trustee until the beneficiary reaches age X. Until the beneficiary turns X, the trustee can apply the share of the estate to or for the benefit of the beneficiary. The will can also specify that the trustee must pay a portion of the share to the beneficiary when the beneficiary reaches a specified age less than X. For example, if X is thirty, the will could specify that the beneficiary is to receive a percentage or fixed sum from the beneficiary’s share at age twenty-five, with the rest continuing to be held in trust for the beneficiary until the beneficiary reaches thirty. When the beneficiary turns X, the trustee must pay whatever is left of the share of the estate to the beneficiary outright. Again, the trustee has no discretion to retain the funds once the beneficiary turns X, regardless of the beneficiary’s circumstances.
3. The will specifies that a beneficiary’s share of the estate is held in trust by the trustee. The terms of the trust give the trustee complete discretion as to what payments will be made to the beneficiary, and the trustee has complete discretion to determine the 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 twenty-five years of age unless there are overpowering reasons not to.”[1]With this approach, the trustee can decide whether paying the money out to the beneficiary at a given time is prudent.

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. Options 1 and 2 also do not provide much in the way of creditor protection for the funds. If the beneficiary has debts, creditors can wait until the beneficiary turns nineteen / age X and then receive the beneficiary’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 beneficiary the assets at nineteen / age X, or if the funds would go into the hands of a creditor of the beneficiary at that time, the trustee can decline to pay assets out to the beneficiary or can fine-tune payments to maximize benefits and minimize harms.

Option 3 can prevent situations where beneficiaries would spend the money thoughtlessly or in a way that may be dangerous to their well-being (e.g. drugs, alcohol) and help avoid estate assets set aside for the beneficiaries from being claimed by their creditors. Similarly, suppose a beneficiary is disabled and receiving means-tested benefits. This approach allows the trustee the discretion to apply the beneficiary’s share of the estate in a way that preserves the benefits the beneficiary receives from other sources (e.g. government disability supports) that they might lose if they received a large lump sum outright. While a minor beneficiary may not be disabled at the moment, unforeseen diseases and accidents may cause unexpected disabilities. 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, and financially stable pillars of the community well before one dies. If that happens, one can update the will, likely to make those wonderful children into executors. At the same time, one can adjust one’s estate plan for the new circumstances in other ways. For example, one may remove 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 being beneficiaries of one’s will.

To account for the possibility of a responsible adult child predeceasing and leaving minor children alive, one might consider specifying in one’s will that any share a predeceased child would otherwise have received is to be held in trust for the descendants of that child. The Trustee can be given a guiding Letter of Wishes expressing the hope that the Trustee will pay the remaining contents of the trust to the predeceased child’s children (the “Grandchildren”) upon the youngest Grandchild reaching twenty-five years of age unless there are overpowering reasons not to do so.

Beneficiary-Designatable Assets and Minor Children

If one has beneficiary-designatable assets like life insurance, Tax Free Savings Accounts (“TFSAs”), Registered Retirement Savings Plans (RRSPs”), Registered Retirement Income Funds (“RRIFs”), and other similar assets (collectively “Beneficiary-Designatable Assets” or “BDAs”), there is another related consideration requiring attention. The holders of BDAs should generally not just uncritically designate minors as beneficiaries (or alternate/contingent beneficiaries). Suppose minors are named to receive a BDA payout directly. In that case, the Public Guardian and Trustee may become the trustee (and pay themselves out of the money) until the minors reach the age of majority, just as they would if a will named a minor beneficiary and does not create a trust to hold that beneficiary’s share.

To avoid this outcome, there are two main options:

(A) BDA proceeds pay into the estate. The funds are thus part of the estate governed by the will. They flow, usually as part of the residue of the estate, into the trusts set out in the will to account for minor beneficiaries.

(B) BDA proceeds pay into a separate trust created by a document 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 BDA trust (the “Declaration”) may parallel the terms of the will. This can result in multiple trusts for minor beneficiaries: one(s) created by the will holding their share(s) of the estate, and another or others made by the Declaration(s) controlling the share(s) of the BDA proceeds.

Option A has the benefit of relative simplicity and lower cost of setup. Only a will is needed instead of a will and a Declaration(s). The drawbacks include subjecting BDA proceeds to estate creditors, probate fees, will variation claims by spouses and children, and the administrative delays of the probate and estate administration processes.

Option B has the benefit of allowing BDA proceeds to be paid to a trust or trusts created by Declaration(s). This can account for the needs of minor beneficiaries. It can also allow such assets to pass to beneficiaries without being subject to probate fees and with insulation from will variation claims. The drawbacks include the additional expense of setting up the Declaration(s), ensuring alignment with the overall estate plan, and the risk of potential duplication of administration expenses due to the existence of more than one trust for the same beneficiary or beneficiaries.

Individuals whose estate may pass to minor beneficiaries (e.g. children or grandchildren) should carefully consider whether they prefer options 1, 2, or 3. Individuals with Beneficiary-Designatable Assets should also consider whether they would prefer option A or B.

By working with qualified professionals to proactively attend to the kinds of considerations addressed in this article, individuals can build a robust foundation for a well-executed estate plan that aligns with their overall goals and reduces the risk of leaving an unintentional legacy of expense, conflict, or outright harm. This can be a challenging process. It requires carefully considering the details of one’s assets, wishes, and goals. It also requires keen attention to one’s family structure and dynamics as well as the relevant legal and tax considerations.

Careful planning like this is always a worthwhile exercise. An ill-conceived estate plan (or, worse, the lack of a plan entirely) can have two primary undesirable outcomes: (1) significant expense, delay, confusion, and prolonged legal conflict for surviving family and beneficiaries, and (2) a few estate litigators get to purchase bigger boats and go on nicer holidays at the expense of your estate and family members.

If you have any questions about estate planning for minor beneficiaries, or any other estate planning or administration matters, we can be reached here.

[1] Modified from wording found in James Kessler and Fiona Hunter’s excellent book, Drafting Trusts and Will Trusts 4th ed (Toronto: Lexis Nexis Canada, 2016) at 128.