Protecting Your Child's Inheritance From Getting Taxed
What Are the Inheritance Rights for Children?
One important concern of parenting is what will happen to your children in the event of your death, especially if that death occurs while your children are still minors. Having a will is essential for providing not only guardianship and care of your children, but also providing financial assets in the form of an inheritance. While many people have life insurance policies that can provide for some financial support by naming beneficiaries such as a spouse or children, having a will to outline how your finances and assets will be allocated to your children after your death is crucial to protecting their rights when it comes to inheritance. In order to protect your children’s inheritance rights, it is important to understand the law and how it works when it comes to the distribution of assets upon a person’s death.
What Is the Legal Definition of Children?
Changes in society have brought about changes in the legal definition of children. In the past, “children” were legally only defined as legitimate children born through a marriage. Today, the legal parameters of the word “children” include legitimate, illegitimate children (born outside of marriage), and adopted children. Adopted children are the legal responsibility of the adoptive parents. Legal connections to natural parents become severed upon signing of the adoption order. Stepchildren are also not legally considered children unless they are legally adopted by the stepparent.
Intestacy rules, or rules regarding the distribution of assets upon the death of a person, go into effect with certain restrictions and stipulations that can have a negative effect on the inheritance rights of children if a will is not established by the parent and the proper legal ties are not established. This can cause issues in the case of a blended family situation where minor stepchildren are involved. Other situations, such as a parent getting remarried after the death of a spouse, can have an impact on the inheritance provided for minor children if provisions are not stipulated in a will.
What Are The Different Ways Children Can Inherit?
There are many ways to ensure that your children will be provided for in the event of your death. Protecting your inheritance for kids is a real concern for parents, especially those who are in blended family situations or sole-surviving parents of minor children. One way to make sure that all of your children, whether legally considered your children or not, are provided for after your death is to have them named in your will. In this case, the legal definition of “children” will not change, but stepchildren or other children not legally considered a child of the deceased can be named in the will as a beneficiary to provide them with an inheritance of assets or money. The will can also outline who should not inherit, thereby excluding specific people from inheritance under the terms of the will.
Under The Inheritance (Provision for Family and Dependants) Act 1975, a child can make a claim against the estate if a reasonable provision has not been made for him or her. This Act also allows a person to claim an inheritance for a child who may not legally be designated a child of the deceased but perhaps was in a position to be considered a child of the family. This would especially be important in the case of a stepchild who depended on the deceased for their livelihood and support and who may not be legally defined as a child of the deceased and therefore not included in the terms of a will. There are many instances where this can occur, even in situations as simple as an illness or accident taking place before a will is able to be amended or adoption is able to be processed or finalised. Always take some advice if looking to disinherit someone whom might otherwise be expected to inherit. There are ways to minimise the chances of a claim being made to your will to protect your interests and the interests of those named in your will. A ’no-contest’ clause can be added that would remove someone’s gift in the will if they try to bring a claim but this will not prevent from bringing a claim or being successful at Court.
Another way to pass an inheritance on to a child is through a trust. When a will is written, provisions are made for a trustee to be named who, among other responsibilities, will administer the inheritance for children named in the will until they reach a nominated age. Sometimes this is 18, the legal age of adulthood, although it can be any age. There are certain tax benefits to having this age no older than 25 depending on the amount of the inheritance and the type of assets that are gifted but control and protection should usually take precedence over tax. Setting up a trust can be done in a number of ways to funnel the inheritance to the minor, including:
- Bare Trust - If a trust has not been set up for a minor child in the will, a trust will automatically be formed to be paid upon the child turning 18. The executor of the will or trustee will be responsible for monitoring the inheritance until the child reaches the age of 18.
- Age-contingent Gifts - This would occur if the deceased outlined specifically an age at which a minor child would inherit their funds and assets in their will.
- Discretionary Trust - This option gives more power to the trustee to be flexible with funds and pay out monies for supporting the minor child’s inheritance at their own discretion. In this instance, it is recommended that a Letter of Wishes be written for the trustee to provide guidance as to how funds should be used to support the minor child. This can include such things as investments, education, or property. A particular benefit here is potentially allowing Guardians for minor children to benefit. Guardians can be overlooked financially. A gift to children does not necessarily help guardians if they have to extend their home, buy a bigger car or incur other expenses to look after someone else’s children. As Guardians can be looking after children for a long time, it is often important to look to their needs as it can affect the children.
- Life Interest Trust - This allows the beneficiary to use any income from the property or cash listed in a trust, but not the property or cash itself. Income used in this form of trust may be subject to income tax.
Setting up conditions for your will to provide your family inheritance can be intricate and complicated, so it is recommended to discuss your particular situation with your solicitor. As families change and children grow, so do the needs your children may have for your inheritance. Wills should be updated often to keep current based on assets, family situations, and needs of the children.
How to Protect Your Children’s Inheritance
Whatever provision you have included in your will for your family’s inheritance, when it comes to leaving an inheritance to a child, things can get complicated quickly, especially with regard to inheritance tax.
If your inheritance is paid out to multiple people, including a spouse, some inheritance tax may be charged and there could be a need to consider the apportionment, calculation and balance of this. However, some gifts put into trusts may be subject to different tax rules, especially when it comes to trusts for minor children.
Understanding the law surrounding inheritance tax is especially important when writing your will and setting up trusts for your children. For instance, if a trust is made by parents where a property is inherited by the child at a certain age, there may be some “exit charges” applied to the funds left in the trust after the child reaches the designated age. With the introduction of the Residence Nil Rate Band in 2017, there can be some further complexities around leaving property to children in a trust. In addition, some assets may be subject to capital gains taxes when the child becomes of age. This may not apply until the asset is sold, but it is an important factor to be aware of when making provisions so that surprise costs do not occur.
Family dynamics can play a role in inheritance for kids as well. If you are in a blended family situation, an issue that commonly arises is “what happens to my children’s inheritance if my spouse remarries after I die?” Changes in intestacy rules largely benefit the spouse of a deceased person over the children in cases where there is no will. This is another reason why having a will is so critical when determining the inheritance for your children.
Planning for Their Future
Your estate planning solicitor can help you use your will as a tool to provide for your family. The larger your estate, and the more complex your family circumstances, the more complicated the execution of the will can be. Add to that a number of beneficiaries, some of them minor children, and the possibilities grow quickly. Taking the time to carefully evaluate your assets and outline your wishes in your will is a critical part of protecting your child’s inheritance. Family situations can change, as well as assets and the amount to be inherited, so updating your will regularly when you have growing children is recommended. In the long run, keeping your children’s inheritance protected will help to ensure their future and leave you with peace of mind that they will be secure after you have passed.
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