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How Do You Provide For A Child Who Can’t Manage Money?
Author: 
Philippe Richer
October 19, 2022
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Most of our clients are lucky - they live a long life and have children who function well. While kids often veer off the path, they eventually settle down into a relationship, family and career. In these cases, preparing a will is relatively easy. Testators give assets to their spouse first, and when the remaining spouse passes to the kids.

But as life can throw unexpected “curve balls,” some parents face bigger challenges. Some children are disabled, some suffer from substance abuse, some are involved in unhealthy relationships and some simply can’t manage funds. Or parents pass tragically before their children attain the age of majority. How does a parent (or grandparent) look after that child or grandchild without giving them the means to hurt themselves or be taken advantage of?

We deal with these issues on a weekly basis. All these issues impose significant problems for those who want to do the right thing. While we can’t solve the underlying causes, there are tools available to help families in these situations.

Simple Solutions Are Best

As with anything in law, there’s no perfect solution. Every option comes with its advantages and disadvantages. It’s best to think of these options as fail-safes rather than perfectly tailored gifts. A testator wants their will to be robust enough to handle a variety of different situations.

Delayed Distribution

The most common scenario involves parents with minor children. When they prepare wills, we recommend delayed distribution. It’s usually unwise to give an 18-year-old hundreds of thousands of dollars. Rather, we recommend issuing certain percentages at different ages. For example, 10 per cent at the age of 18, 20 per cent at the age of 21 and the balance at 25. There are no hard and fast rules in these cases. The share can be distributed in two, three or four payments, and the percentage can vary for each payment.

The issues that should be considered include the level of responsibility of the children, the discretion given to the testator in distributing funds before the proscribed dates and the length of time a trustee is responsible.

A testator can give a trustee discretion to distribute the funds before the dates specified in the will. That discretion can be wide or narrow. Wide discretion allows the trustee to give funds for any reason the trustee feels appropriate. We usually recommend this approach because it’s hard to determine ahead of time the needs of the future beneficiary. Alternatively, testators can restrict that discretion to things like buying a home or education. In the end, testators are free to impose as many or few restrictions as they feel appropriate.

Another factor that should be considered is the length of time that the trustee will be bound to manage the funds. We discourage clients from establishing trusts that last decades. If you pass away while your child is still young, say five years old, you create a trust that delivers the final payment at the child’s 40th birthday (you’re creating a trust that could last 35 years). You’re asking your trustee to be responsible for this for a long time. As it is, providing a final distribution date at the age of 25 still leaves a trustee on the hook for 20 years. That’s quite the burden.

Beneficiaries Unable To Manage Funds

Unlike the previous category, this category of beneficiaries can be broad and admittedly involves some judgement. The inability to manage funds may be caused by personality because the person suffers from addiction or is involved with a toxic partner. In each of these cases, the testator wants to give a legacy but usually on conditions. For example, a beneficiary must remain sober or they must start making better decisions. While the intention is noble, the practicality is anything but that.

Setting parameters under which the beneficiaries can receive money requires a tremendous amount of discretion and judgement. It would be unfair for the executor, usually the “responsible child,” to be put in a position of managing their siblings' money and deciding when a person has been sober long enough. A testator could unintentionally set up a situation that leads to litigation and family turmoil.

Annuity

In cases like these, a testator can instruct an executor to establish an annuity for a specific beneficiary. It relieves the executor from having to decide when to transfer funds or having to act as “judge and jury” in deciding whether a beneficiary request should be completed. So rather than receiving a lump sum, a beneficiary would receive monthly payments for a predetermined time or for life. The exact amount and length would be determined based on the funds available. While not perfect, this is a good solution because it provides something, but not all at once. 

Henson Trust And Disabled Children

Paradoxically, a severely disabled child who lacks the competence to care for themself is perhaps the easiest to help. Often these children, even as adults, require care and receive government funding. However, that government funding is subject to the child’s means. If the child has access to funds, the funding will be cut or reduced. It can create significant problems for the child’s family. Should that child receive an inheritance, their funding will likely be cut. 

The simple answer is to exclude that child from the will. However, this is too difficult for parents to entertain. In these specific situations, we can establish a Henson Trust. This type of trust is named after a 1987 Ontario court decision. In that case, Miss Henson was disabled and received government funding. Under her father’s will, $82,000 was set aside for her benefit. But, the use was at the discretion of the trustee. If the funds were not completely used up before her passing, the remainder was to be distributed to a charitable organization.

Under these circumstances, the court held that Miss Henson could not exercise control over the funds and were therefore, not legally hers. She would only become the legal owner of anything given to her by the trustee at the time it was given. Following this decision, she continued to receive government support.

There are some key elements here. The funds must be given to a trustee who has absolute discretion, and the remainder – what isn’t used up – must go to another party or parties. Though, one must be careful when and where these are used as some provinces have outlawed them.

Conclusion

While providing for minor or disabled children or those who have difficulty managing funds can torment testators, practical solutions are available. None of these are perfect. We cannot help someone create a trust that gives the exact amount of funds at the perfect time to a sober alcoholic. But we can establish some basic rules and safeguards that prevent someone from ‘burning through’ their inheritance, or in the case of a severely disabled child, protecting their government support. A parent can rest easy knowing that they’re not abandoning their child.