David White discusses how you could ensure that your children’s financial situation was looked after should anything ever happen to you while they were still young.
Last week, we considered what happens when a child’s parents die whilst the child is still of a young age. The importance of a ‘Guardian’ was highlighted and it was recommended that appropriate provision for this be made in your Will. Whilst this appointment caters for the child’s welfare, the law treats the child’s finances separately. As such, in this part, we consider what financial decisions require to be made and how you can prepare for this.
The Child’s Finances
When a child is young, you may be forgiven for wondering what significant assets they personally own. Sure, they may have a piggy bank full of copper coins, or perhaps a gift they have received for their birthday. However, generally speaking, these ‘assets’ will not be of significant monetary value.
Nevertheless, a child of any age has the right to own and inherit property. At the age of 16, in the eyes of Scottish law, they become adults. They gain ‘active capacity’ which allows them to enter transactions e.g. contracts of purchase or sale. This is not of great concern to most parents but it can have significant implications if the child’s parents were to die. In this case, it is likely that a child will inherit from their parent’s estate and if this happens at a young age, the child may have a reasonably sized estate, potentially including a property, cash sums or long-term entitlements.
If the child is under 16 and inherits an estate value of over £20,000, the deceased’s Executor will have to apply to the Accountant of Court who will supervise them in how to manage the funds. However, once they are over 16, the child will inherit the funds outright and can use these in any way they choose.
So what should I do?
For the cynical-minded amongst us, a 16 year old may not be trustworthy with their pocket money, let alone their parents’ worldwide assets! Therefore, it is recommended that you put in place a Will which includes trust provisions. A trust can be used as a vehicle to hold funds until the child attains a specific age or suchlike. This means that they will not inherit the funds outright on their 16th birthday and run the risk of frittering your life savings away!
When contemplating trust provisions, there are two main decisions which you should consider. Firstly, you will need to decide on the type of trust to use. There are a variety of trust options, with different tax regimes and mechanisms for how they operate. You shouldn’t expect to know the ins and outs of trust law and your solicitor will be able to advise you on this, catering the trust to your personal circumstances.
The second decision is appointing a suitable Trustee. This will be the person who is formally in charge of administering the trust on behalf of the child. The Trustee’s powers will mostly be determined by the terms of the Will – again, your solicitor will be able to advise on this. With great power comes great responsibility and the duties of the Trustees are wide-ranging from their duty of care to the child and using the funds strictly as intended. It is always good practice to reinforce any specific wishes you have for the trust funds in a written Letter of Wishes.
If a ‘Guardian’ deals with the welfare decisions, think of the ‘Trustee’ as the person dealing with the financial decisions. You will appreciate that this can often lead to significant overlap. Therefore, it is important to consider whether your Guardian and Trustee have a common understanding of your wishes for the child and that they will be able to cooperate with each other. In some cases, you may feel it is more suitable to appoint the same person in both roles.
How can BTO help?
For all young parents, we would strongly recommend including trust provisions in your Will. This means that you know your savings, investments and other worldly assets are inherited by your children, but also safe and secure until they attain the necessary maturity and responsibility to take control of the funds. In addition, you can determine who will be responsible for looking after your child’s finances and provide guidance on how these funds should be used, even if the unimaginable happens.
The BTO Personal team has in-depth experience of assisting with family and succession planning. We can advise you of the options available, guide you in your decisions and provide a robust, legally valid Will document. If you would like to discuss this topic further, please do not hesitate to get in touch.