Speed of Inheritance
"Planning for the Distribution of Inheritance to Minors"
The distribution of an inheritance to minors can often be the result of unforeseen circumstances, and in many cases is poorly planned - delivering a less than optimal outcome.
There is nothing more certain than death and taxes. While it is possible to plan for taxes, the timing of death on the other hand is a different situation.
Speed of Inheritance
Prince William, the elder son of Great Britain’s Prince Charles and the late Diana, Princess of Wales, recently got a very nice present for his 30th birthday - an inheritance worth more than $15 million.
Under the terms of Diana’s will, each son (William and younger brother Harry), on their 30th birthday, receive half of the trust fund she left to them. Harry will have to wait a few more years to claim his share.
It’s not surprising that Diana, though only 36 at her death, had done extensive estate planning and had obviously given some thought to how old her children should be when they inherited their respective shares of her fortune.
But even though those of us who aren’t fabulously wealthy should consider the options when drawing up an estate plan that includes children.
If you don’t set up some kind of mechanism for distributing money to children, then they’ll get everything, no strings attached, when they reach legal adulthood at age 18.
That’s not what most parents want and actually not what most children actually want in the long term.
With average life expectancy for New Zealanders now over 80 years and with many parents having a family in their early 30’s, it likely that the majority of people nearing their twilight years will be thinking of how to make distributions to their adult children and grandchildren, rather than to their children as minors.
Plan for the Unexpected
The early onset of terminal illnesses or unexpected accidents as was the case with Princess Diana, will result in the need to transfer an inheritance at an earlier age.
When assets are left to a spouse or partner the transfer of assets by inheritance is an easier process to plan for as they can often simply transfer across in their entirety.
In the event the deceased’s partner is previously deceased, dies at the same time or the deceased is estranged from their children’s other biological parent, the decision of how to leave assets requires definite consideration.
It is prudent to ensure that your Will and that of your spouse include well considered provisions around distributions to children who may be minors, as catastrophic accidents can effect more than one person at the same time.
Trusts vs Direct Ownership
How should an heritance will be distributed to children eg, through a Trust, or directly to the individuals.
When Trusts are used, it is important to ensure that trustees have necessary experience to fulfil the role. The ‘family friend trustee’ can often find it difficult to say ‘no’ to requests from beneficiaries which parents, would have easily said no to if they were still here. On the other hand, ‘professional trustees’ who do not know the family can lack some necessary empathy.
A mix of ‘family friend trustees’ and ‘professional trustees’ can deliver a team with the necessary blend of empathy and skills in trust management.
When a decision is made to distribute to individuals, from the estate when beneficiaries are of a specified age, or through distribution from a trust at a predetermined age, consideration needs to be given to how the beneficially will be protected in the event of a relationship failure. In no time at all, the financial fruits of your hard earned efforts could be diminished through a relationship breakup with the incorrect structure.
Parents, if they were here, may well have considered assisting family members into a first home through a loan protected against relationship breakup.
If they are to provide the same for them in their absence, it is important to ensure that beneficiaries are protected in a similar way.
When a family owns a business, further complexity is created around the inheritance process.
Consideration will need to be given to not only who will manage the business(es) until such time as they will be sold or transitioned to children, but also as to what external experience (if any) would be appropriate for the children to gain before they take the reigns.
What happens if not all children or beneficiaries wish to remain in the family business? How do you ensure that beneficiaries receive a fair share of the total estate, while at the same time not placing undue pressure on the business to release?
Managing Family Debt and Third Party Shareholdings
In many cases, when families (both parents and children) are younger, families may have debt against the family home or business.
While this debt is manageable when parents are alive, managing this debt can be difficult when parents are no longer around.
In other cases, families may be in business with external shareholders, who may not have the financial capacity to acquire the remaining shareholding that was owned by the family.
It is prudent to ensure that the family has appropriate levels of life insurance so that executors of an estate can make decisions to maximise the benefit of beneficiaries and not to meet short term are not pressured to make decisions to meet short term cash flow requirements.
It is also prudent to consider holding insurance within the business so that, so that if required, a third party shareholder can acquire family shares from an estate – reducing the risk that much of the value of an estate is forced to remain as a passive shareholding in a company over which they have no direct management control.
The unexpected death of a parent or parents will in most cases draw siblings closer together. It is important to ensure that any estate planning caters for the different aspirations of individual children, treating them in a comparable way taking into account individual personal circumstances – and above all ensuring that a Will does not serve as a document to create sibling tension.
Factors to Consider
There are a number of factors to consider when thinking through the distribution of inheritance to minors as a result of unfortunate and unforeseen circumstances.
What structure will be used to transfer inheritance – eg direct to beneficiaries or through a Trust?
How mature are the beneficiaries, and accordingly, how prepared will they be to manage an inheritance?
Will the beneficiaries have the foresight to know what they don’t know and seek appropriate external advice?
Is there an extended family network or family friends who can assist in preparing beneficiaries, in a similar way that you would have?
Will the inheritance be largely in cash or investments or is it likely that the inheritance may include operational business assets?
If business assets are included – who would run the business in the interim until it can be sold or until beneficiaries are of an age to take over?
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