Children & Dependents

Planning for the financial future of children and dependents is a crucial aspect of inheritance planning. This article covers key considerations to ensure your loved ones are properly provided for and protected.

Guardian Arrangements

Making proper arrangements for who will care for minor children if both parents die is one of the most important aspects of estate planning.

Appointing Guardians

• Guardians can be appointed in your will to care for children under 18
• If no guardian is appointed, the court will decide who raises your children
• The appointment takes effect only when both parents have died (if both had parental responsibility)
• Consider appointing substitute guardians in case your first choice is unable to act
• Guardian appointments are technically only valid until children are 18, but most guardians will continue to provide support beyond this age

Selection Criteria

• Consider the potential guardian’s values, parenting style, and life circumstances
• Physical proximity to the child’s current home, school, and extended family
• Financial stability and available time to devote to raising children
• Age and health of the potential guardian
• Existing relationship with your children
• Willingness to take on the responsibility

Practical Considerations

• Discuss your intentions with proposed guardians before appointing them
• Consider appointing a different person as trustee/executor to manage financial assets
• Document your wishes regarding education, religion, and other important aspects of upbringing
• Review and update guardian appointments as family circumstances change
• Consider international implications if proposed guardians live abroad

Financial Support

• Ensure sufficient life insurance to support your children’s upbringing
• Consider setting up a trust to manage assets for children’s benefit
• Provide guidance on how funds should be used for children’s needs
• Make arrangements for the guardian’s additional housing needs if they will raise your children in their home

Inheritance for Minors

Children under 18 cannot legally own property or manage significant financial assets, requiring special planning considerations.

Legal Limitations

• Children under 18 cannot directly inherit significant assets in the UK
• They cannot give valid receipts for assets or manage investments
• Without proper planning, the Court of Protection may become involved
• The statutory legacy on intestacy may create complications if children are beneficiaries

Trust Arrangements

• Bare trusts: Simplest option where trustees hold assets until child reaches 18
• 18-25 trusts: Allow assets to be held until children are older (up to 25)
• Discretionary trusts: Provide maximum flexibility for trustees to determine distributions
• Bereaved minor’s trusts: Special tax status for trusts created on parent’s death

Age Considerations

• Consider whether 18 is an appropriate age for children to receive significant assets
• Staged inheritance (e.g., portions at 21, 25, and 30) can be more prudent
• Balance protection from immature decisions against restricting children unnecessarily
• Different ages may be appropriate for different children based on their maturity

Intestacy Risks

• Dying without a will means children may inherit at 18 under intestacy rules
• Court of Protection may become involved in managing assets until then
• Statutory trusts have limited flexibility
• Step-children have no automatic inheritance rights under intestacy
• Creating a will is essential to ensure appropriate arrangements

Disabled Beneficiaries

Special considerations apply when planning for beneficiaries with disabilities to protect their inheritance and ensure their needs are met.

Benefit Implications

• Direct inheritance may affect means-tested benefits
• Assets over £6,000 can reduce benefits, while assets over £16,000 can eliminate some benefits entirely
• Income from inherited assets is considered for benefit calculations
• Proper planning can protect both inheritance and benefit entitlements

Disabled Person’s Trusts

• Specially designed trusts with favorable tax treatment
• Must meet specific criteria regarding the nature of the beneficiary’s disability
• Can provide supplementary support while preserving means-tested benefits
• Trustees have discretion to make appropriate distributions

Vulnerable Person’s Trusts

• Similar to disabled person’s trusts but with wider application
• Special tax treatment that mirrors the beneficiary’s personal tax position
• Can be useful for beneficiaries with mental health conditions or learning disabilities
• Professional advice essential to ensure the trust qualifies

Personal Independence Payments and Other Benefits

• Some disability benefits are not means-tested and won’t be affected by inheritance
• Personal Independence Payment (PIP), Disability Living Allowance (DLA), and Attendance Allowance continue regardless of assets
• Employment Support Allowance (contributory) and Carers Allowance are not means-tested
• Understanding which benefits might be affected is crucial to proper planning

Care Provision

• Consider incorporating care plans and preferences into trust documentation
• Letter of wishes can provide detailed guidance for trustees
• Regular reviews ensure arrangements remain appropriate as care needs change
• Consider appointing trustees with understanding of the beneficiary’s specific needs

Education Planning

Planning for children’s education costs is often a key priority in inheritance planning.

School and University Fees

• Consider setting up designated education trusts
• Regular gifting strategies can fund education while reducing IHT liability
• Grandparents often play a key role in education funding
• Bare trusts or 18-25 trusts can be effective vehicles for education funds

Junior ISAs and Child Trust Funds

• Tax-efficient savings vehicles for children
• £9,000 annual contribution limit per child (2023/24)
• Funds belong to the child and accessible at 18
• Cannot be redirected if the child decides not to pursue education

Grandparent Contributions

• Gifts from grandparents can be exempt from inheritance tax (using annual exemptions or normal expenditure out of income)
• Skip-generation planning can be tax-efficient
• Consider whether gifts should be made directly or via parents
• Regular patterns of educational support can qualify as normal expenditure out of income

Alternative Structures

• Family Investment Companies can provide education funding while maintaining control
• Discretionary trusts allow maximum flexibility in distributing education costs among multiple children or grandchildren
• Offset mortgages or loan arrangements can provide education funding while preserving assets
• Life insurance policies can ensure education plans remain funded if parents die prematurely

Protecting Children’s Inheritance

Various strategies can protect children’s inheritance from divorce, bankruptcy, or poor decision-making.

Trust Protections

• Discretionary trusts provide maximum protection as beneficiaries have no absolute entitlement
• Letter of wishes can guide trustees without creating legal rights
• Lifetime interest trusts can provide income while protecting capital
• Professional trustees can provide objective assessment of distribution requests

Step-Family Considerations

• Mirror wills may not provide adequate protection in blended families
• Life interest trusts can benefit current spouse while protecting capital for children
• Clear communication about intentions can prevent future disputes
• Consider separate provisions for different branches of the family

Divorce Protection

• Inheritance received by a child is potentially vulnerable in divorce proceedings
• Trust structures can provide some protection, though courts have wide powers
• Timing of distributions can be managed to minimize risks
• Encourage prenuptial agreements for adult children before making substantial gifts

Spendthrift Provisions

• Trust provisions can protect children with spending or addiction issues
• Staggered distributions based on age or achievement of milestones
• Income streams rather than capital sums
• Matching provisions (trustee matches what beneficiary earns)
• Incentive provisions tied to education or career

FAQ