Young Families and Estate Planning – What you need to know
Starting a family is often one of the main triggers for clients to either update their existing estate plans or begin the process of implementing a new one. For many of these young families, the key concern is who will look after their children if they both pass away and how will the estate be managed whilst their children are still minors.
In the event you pass away, your children’s other surviving parent will usually become the legal guardian of the child, unless that would not in the best interest of the child (for example where there are existing court orders removing parental responsibility from the surviving parent, a restraining order against the surviving parent, incidences of domestic violence perpetrated by the surviving parent or a history of drug or alcohol abuse by the surviving parent).
If there are no specific written instructions in your will and you both pass away, then a person with sufficient interest (i.e. grandparents, aunts, uncles etc) can apply for guardianship of your children. In such situations, the Family Court decides who should become the legal guardian based on the best interests of the child. This approach can at times result in lengthy and costly legal battles, as often family members cannot agree on what is in the children’s best interests. For example, there could be a disagreement between two sets of grandparents. For this reason, it is important that both parents ideally name the same persons as guardians in each of their wills.
Appointing a guardian for minor children is an important step however there are many things you should consider before making a final decision. We recommend that clients have regard to the following:
- The age of the nominated guardian – are they of advanced age and will they physically be able to meet the demands of caring for your children, especially young ones.
- The financial and emotional impact your death and care of your children is likely to have on the nominated guardian.
- Do they currently work? What will guardianship mean for their employment, especially if they don’t already have children of their own or have adult children only.
- Where will the children live? Is the guardian’s home large enough to house your children or will additional arrangements need to be made?
- Does the guardian expect to be paid for the role?
- Does the guardian have children of their own that are attending school, and what does this mean for your schooling preferences for your surviving children?
- Are the guardians located overseas? If so, who will look after the children prior to their arrival (especially noting current Covid-19 travel restrictions) and where will the children ultimately be based.
- If the plan is for your children to relocate overseas to be with family or vice versa, have you considered VISA issues?
- If your children are older, have you considered their wishes?
- What relationship do the children have with the nominated guardian?
Depending on the above, we can work with you to ensure that appropriate provisions are included in your Will to overcome some of these issues. For example, your new Will may include a right for your children’s guardians to move into your family home and reside rent-free which would enable your children to have continuity of environment and schooling.
At times we also recommend a Letter of Wishes addressed to the guardians of your children. This letter is a non-binding document which can set out your wishes relating to day-to-day things like extra-curricular activities, pocket money and mobile phones etc.
Managing Estate Funds for Minors
Other major issues that often arise, for young families in estate planning, is who will look after the funds assigned to the children whilst they are minors.
There is no requirement for the person managing the children’s estate funds to be the same as the guardian. In fact, we often advise clients to separate these two roles to make it is less likely that estate funds will be misappropriated by guardians.
There are several different structures which can be implemented in wills to ensure that your children’s inheritance is administered appropriately. Typically, a minor child’s inheritance will be held upon some form of trust. The trust arrangement ordinarily appoints a person/s to manage and invest the funds whilst the children are minors and to distribute income and/or capital from the trust as and when required. These funds are generally distributed to the guardian to apply towards ongoing education, care and maintenance.
Although all trusts created under a Will are testamentary in nature, typically lawyers and accountants refer to a particular type of testamentary trust known as a discretionary testamentary trust. These types of trusts are established in a persons will but do not ‘begin’ until the will-maker has passed away. They establish a class of beneficiaries, which includes your children and enable the trustee to decide who from the beneficiary class receives income and capital and in what proportions. It is possible to create one testamentary trust for all surviving children or separate trusts for each of your children.
The advantages of Testamentary Discretionary Trusts include:
- The ability to delay the age at which your children take control of their inheritance (for example, your children will not be able to access the capital of the trust until they are 25 or 30),
- significant tax benefits as children are taxed as adults, allowing a greater share of trust income to be distributed tax-free, and
- protection for your children in the event of bankruptcy or future Family Court proceedings (subject to being structured appropriately with the assistance of a lawyer)
As trusts can be quite complex, it is important to work with an experienced estates lawyer who can guide you on the best terms and provisions for your individual circumstances.
If you would like to discuss your young families estate planning arrangements or testamentary trusts, please do not hesitate to contact our Head of Estates, Karolina Rzymkowska by email at firstname.lastname@example.org.
About the author:
Karolina Rzymkowska is a Perth Lawyer and Head of Estates at Lynn & Brown Lawyers. Karolina leads the Estates Team and is highly experienced in both simple and complex estate planning, estate administration and disputed estates.