Your inheritance – how to ensure it is properly allocated to your beneficiaries & not squandered by them

Posted by Luisa-Maria Maroun on 16 July 2015
Your inheritance – how to ensure it is properly allocated to your beneficiaries & not squandered by them

It is every parent’s wish to look after their children and to provide them with opportunities and advantages, with the view to helping them to become independent adults. Sometimes that can become problematic when a person passes away without carefully considering their estate planning needs and putting measures in place to protect their assets and provide for their children.

The first step in ensuring that your children are allocated some of your estate in the manner that you wish is to have a well drafted Will.

However, even having a Will in place may not on its own be enough to ensure you objectives are achieved. This is particularly relevant in situations where children are not able to manage their own affairs. This could be due to factors such as a lack of legal capacity (e.g. they are under 18 years of age), unhealthy habits stemming from addictions, financial carelessness or damaging relationships. Parents are faced with the decision of whether or not to include their children in their Wills and how best to draft their estate planning documents to cater for their children’s future needs.

A common way to address the issue is for the parent to provide for conditional gifts in their Will. For instance, detailed instructions can be provided in relation to early release of the funds for specific purposes such as reasonable educational and medical expenses. If applied correctly, imposing conditions can positively influence a beneficiary’s behaviour. In the case of children who are unable to manage their affairs due to one of the factors outlined above, conditional gifts can assist to steer them in the right way.

An alternate approach is to create a testamentary trust. Testamentary trusts are established by a Will in order to facilitate a greater level of power over the distribution of assets to beneficiaries. By nominating an appropriate trustee to manage the assets of the Testamentary trust, a parent can have greater assurance that their children will not simply squander their inheritance.  Testamentary trusts offer tax advantages and are becoming increasingly popular for this reason. 

There are 2 types of testamentary trusts: 

Discretionary testamentary trust - In the instance, the executor gives the beneficiary the choice to take a share or all of their inheritance via testamentary trust. The primary beneficiary has the authority to eliminate and appoint the trustee. They also have the power to assign themselves to manage their inheritance inside the trust. This can work well for commercially astute beneficiaries who are willing and able to take advantage of tax planning and asset protection measures afforded by the trust; and

Protective testamentary trust - If this type of trust is created, the beneficiary is obliged to take their inheritance via the trust and does not have the choice to assign or remove trustees. This is normally an approach that is taken if the beneficiary is unable to conscientiously control their inheritance by virtue of their age, disability or tendency to waste money. 

At the other end of the spectrum, occasionally parents make the decision to exclude one or more of their  children from their Will. This typically results in the excluded child or children pursuing a claim against the estate. If for whatever reason you wish to exclude a close family member from your Will, it is important to ensure that your Will is  drafted effectively so as to diminish the opportunity of a successful claim against your estate. Further documentation may also need to be prepared in addition to your will. 

Given the complexity of estate planning, it is always recommended that your consult with a skilled and experienced legal practitioner regarding the best approach to your estate planning.