Many of our clients often wish to leave a small gift to the younger people in their lives, for example grandchildren. This gift is normally nothing extravagant, often a small legacy to help the future generation with their education, purchase a car, a down payment towards a home, or maybe just getting started out in life.
These gifts are always well received, however, without proper planning they can cause major headaches for these minor beneficiaries and their parents.
In Ontario, a minor – an individual under the age of 18 – cannot provide a valid legal release and discharge to the executor if they receive an inheritance outright. This includes gifts from an estate, regardless of whether there is a will, or monies payable from a life insurance policy or registered plan.
Unless someone is given the legal authority to manage the money and who can provide a valid release to the executor, the minor is not able to receive these funds personally until he or she attains the age of 18.
So, what happens when a minor gets an inheritance outright?
Without proper planning, in order for the executor to receive a legal discharge, a minor child’s money can be paid into court and held by the Accountant of the Superior Court of Justice until the child reaches the age of majority, which in Ontario is 18. Upon payment into court, the executor is discharged and has no further responsibility. The Accountant will invest the money at a rate to be determined dependent on current market conditions. If the child requires money before they reach 18, a request can be made to the Accountant for consideration, with the approval of the Children’s Lawyer, whose Office represents the child’s interest in such matters.
Alternatively, an individual can apply to court to become guardian of the child’s property, and can then receive the inheritance on the child’s behalf and provide a valid release to the executor. Many parents will be surprised to know that in Ontario, a parent is not automatically considered the guardian of their minor child’s property. They instead need to commence an application with the court to get an order confirming their authority to receive and manage their child’s inheritance.
The application process can be lengthy and quite cumbersome. It typically involves setting out a detailed financial plan that outlines a proposal of how the guardian will manage the child’s money. This plan needs to be reviewed and approved by the Children’s Lawyer.
Once the guardianship order is granted, the guardian is required to follow the approved financial plan and can only spend the money if directed in the order or plan. As well, they must keep detailed records of their accounts, and often are required to pass their accounts periodically with the court. If the guardian wants to deviate in any significant way from the approved financial plan, they will need to go back to the court to get approval.
The guardianship comes to an end when the child reaches 18, at which time the child will be paid their amount in full.
There are some situations where either payment into court or a guardianship is not needed. For any inheritance under $10,000, the parent or the person with lawful custody of the minor child can receive the money on the child’s behalf without a guardianship order. Regardless, they would still be required to hold and manage the child’s funds with the same care as a guardian.
This process, coupled with the professional fees that would be required in seeking a guardianship and the on-going management of the funds, may deplete the gift to the child.
So, how can this all be avoided? Like with most estate headaches, the answer is proper planning.
If you are looking to leave something to a minor in your life, the easiest way to avoid these issues is to set up a trust directly in your will and appoint one or more trustees to manage the minor’s funds on their behalf. This way, not only will the need for a guardianship of the minor’s property or payment into court be avoided, but you also get a say in who manages the child’s inheritance. Often a child’s parent may be named as the trustee so the executors of the will are not involved in an ongoing trust administration, which can last many years.
This is not the only benefit derived from creating a trust.
A trust is also a good way to control and delay payments to a later date. Rather than having a payout when the child turns 18, the trust terms can direct a payment at a later day or staggered payments at different ages – after all, how many of us can truthfully say we were financially responsible at 18!
Further, the terms of the trust can direct installment payments, and it can direct that funds are only to be used a certain way, such as for education purposes only. Overall, the terms of the trust can be flexible and customized for the minor beneficiary.
Ultimately, what may seem like a minor gift can easily evolve into a major issue without seeking proper advice on the best mechanism for leaving gifts to the younger people in your life.
— Stephanie Battista