Legal Tip 214: Protecting Your Grandchildren’s inheritance

A Grandparent wants to leave some money to their children, but they want their grandchildren to benefit too and are worried that if left to their children they might blow it by spending it or losing in in a risky investment. So, what are the options

a) Leave it all directly to their child and hope for the best (the most common option), or

b) Leave part to the children and part to the grandchildren directly, or

c) Leave all to a Testamentary Discretionary Trust with a carefully chosen trustee and appointors.

d) Leave some to separate TDTs, one with the child as the main beneficiary, and others with each grandchild as the main beneficiaries. The child would be a beneficiary of the grandchild’s trust and vice versa, but control would be separated.

e) Set up one or more TDTs in the will but have the capital restricted. That is the parents could access the income of the trust but not the capital until a certain event happens, and then the trustee would decide who will have access to the capital.

Example

Grandpa Simpson is getting on in years and is working out a way to benefit his only son Homer and his 3 grandkids. Grandpa is conveniently worth $4mil so he could set up his will live this

i) All to Homer directly.

The issue here is Homer could open an Mr Plough business and lose it all. Or he might just spend it and the kids will end up with nothing to not much.

ii) Some to Homer some to the Kids

The issue here is the kids might blow it all on their 18th birthday, turn out to be drug addicts or become bankrupt.

iii) All to the trustee of a TDT

Aunt Patty might be the trustee of the trust with her being able to decide who gets the income each year, who can borrow from the trust, who can access the capital of the trust etc. The appointor shouldn’t be Homer because he could just change the trustee to himself. The appointor could be someone else, perhaps someone who is not a beneficiary and not influenced by Homer. Ned Flanders might be a good choice.

iv) Leave ¼ each to 4 TDTs

Aunt Patty might be the initial trustee of each of the trusts with her deciding who gets what and when. But with a separate trust each the benefit is that control of each trust can eventually be passed directly to the children/grandchildren and this can be done by passing the Appointor position. A common time to do this is when the child reaches 25 years of age, but it could be sooner or later. Perhaps Grandpa Simpson may want Homer to not have control of ‘his’ trust until he reaches maturity at 60 years of age.


v) A capital controlled testamentary trust

Another option is to leave the assets to one or more capital controlled testamentary trusts with Homer in control, or another, with restrictions such as Homer could be able to access the income of the trust, but not the capital. This would pass to the children when they reach a certain age, or milestone – such as upon the death of Homer.