All About Estates

Choosing an Appropriate Age for Young Beneficiaries to Inherit

This Blog was written by: Daniel Watts, Estate and Trust Consultant, Scotiatrust


A very common issue that arises in estate planning, especially when the clients have young children, is deciding when an appropriate age is for the children to receive their inheritance. Prior to this age, the inheritance will be held in trust for the beneficiary, and may be used for their benefit (e.g. paying for university tuition).

In choosing an appropriate age, there are three primary factors that I will commonly discuss with clients to help make a decision:

  • how financially responsible the child is likely to be;
  • the impact of the inheritance on the child; and
  • the size of inheritance.

How Financially Responsible the Child Is Likely Be

The first factor is the most obvious, which is at what age can you anticipate your child will be sufficiently responsible to deal with a large sum of money. The main concern is the child may squander the funds by spending money recklessly. There can be other considerations as well: a child may simply make foolish financial decisions (e.g. putting all the money into a penny stock to “beat the market”), or such as being taken advantage of by fair-weather friends (or worse) that would like to share the wealth. When pondering this factor, you contemplate your own specific child and consider how they deal with their own money now, whether they can be reckless, and whether they can be too trusting or naïve.

What about when the children are still very young? How are you to even guess when your three-year-old will be sufficiently responsible with their inheritance? You aren’t. However, I recommend that clients consider their own personalities in place of their children, as child may, for better or for worse, follow in their parent’s footsteps. The clients can picture what would have happened if they had inherited funds at a certain age. Some clients picture it and feel they would have been fine at 18, and others laugh and are not sure that they would not have been ready at age 25. It is certainly not a perfect science, but can be helpful to make an educated guess as to when your children may be of a responsible age.

Impact of the Inheritance on the Child

Another consideration is impact on the child. If a child were to inherit a significant amount, it may be overwhelming, even if there concern that the child would spend the inheritance frivolously. With a significant inheritance, the child, at age 18, may now be in charge of managing a million dollar portfolio. The child can receive assistance from professional advisors to manage and invest the funds, but it may be a larger responsibility than the parent would like to thrust on their child, especially as the child is without the guidance or counsel of his or her parents.

Likewise, a large sum may “misdirect” the child’s future trajectory. Perhaps the child would have gone to university, then began a career, but since there was a large sum of money available, he or she decided to travel or simply retire really, really early. When the money is gone, or when the child wakes up, their peers have completed their education and started careers. Your child’s access to the inheritance brought short-term gains as he or she enjoyed life, but may have inadvertently stunted some long-term progress in other areas of his or her life.

Size of the Inheritance

The third primary factor is the size of the inheritance. This is not a factor that should be considered by itself, but rather, this should give context to the other factors. The impact of the inheritance on a child, as discussed above, will be magnified by a large inheritance, or the impact may be nominal with a small inheritance. As well, clients are typically more concerned with a large inherence being squandered, rather than squandering a small inheritance.

An important exercise for a person to do is to actually think about what the dollar amount is (if the clients were to pass away in the short-term). Often clients will discuss the amount as a percentage, as that is how they have so far been discussing the issue during the planning process. However, for this issue, it does little to assist a person in asking oneself, “at what age should my child receive 25% of my estate?” Rather, after examining how large the estate may be, ask “at what age should my children receive $900,000 from my estate?”

Balancing the Factors

As will many aspects of estate planning, it is a manner of finding a balance of concerns, and making best guesses. You do not want to create long-term trusts that are unnecessary, whereas you also do not want recklessly drop a large sum on a child where it may be squandered or even harm the child when there is a predictable downside and easy solutions.

For choosing an appropriate age for beneficiaries to receive the inheritance, discussing the three factors can make the conversation more concrete, with an outcome of a more educated guess.

In this posting, I have used a fairly simplistic approach presuming that the funds would be fully distributed at once upon a certain age. There are other customized approaches that I will discuss in a future blog post.

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