How do we ensure our children don’t squander their inheritance?

My mother-in-law, who is in her eighties and quite frail, has decided to change her will so that her entire estate is left to her six grandchildren instead of her four children. How can we ensure that our children do not squander any inheritance? Ideally, we would like them to use it to help fund university costs or to be unable to access it until they reach a sensible age, say 21 or even 25?

Stephanie Brobbey, a senior solicitor at Goodman Derrick, says you may not be thrilled to learn that, strictly speaking, your mother-in-law can do as she pleases. She is perfectly entitled to make provision for her grandchildren to inherit assets under her will when they reach 18 years — if she thinks they will need the money sooner rather than later. She might, however, be open to considering your views and discussing the options with you. 

Many people feel uncomfortable with the idea of their children or grandchildren inheriting substantial assets while they are still young. Typically, those individuals provide under their wills for the assets to be held on trust for the benefit of their minor children or grandchildren until they reach 21 or 25 years.

If under your mother-in-law’s will each grandchild’s entitlement is deferred until they reach 21 or 25, the assets will continue to be held on trust for them by trustees. You should, however, be aware that trusts are subject to their own inheritance tax regime.

Assuming your mother-in-law’s estate is chargeable to inheritance tax, her estate will bear inheritance tax when she dies ─ and the ongoing trusts may result in additional inheritance tax charges when the grandchildren eventually receive the capital. There could even be periodic charges during the lifetime of the trust depending on the nature of the trust and how long the assets are tied up. 

If your mother-in-law decided she wanted to maximise flexibility and asset protection, she could consider leaving her estate in a discretionary trust and leave it to the trustees to decide how and when the grandchildren should benefit, depending on their individual circumstances. Although this is a useful vehicle in terms of protecting younger beneficiaries in the long term, your mother-in-law may not feel comfortable granting such extensive powers to the trustees. 

She could give her grandchildren an immediate-post death interest (IPDI) in her estate. This would give them the right to the income arising on their respective shares of the estate and defer their entitlement to inherit the capital at a specified age, such as 21 or 25. Each grandchild would have the right to the income on the capital as it arises, so they would enjoy some of their inheritance while protecting the capital until such time as they are mature enough to manage it themselves.

The trustees would also usually have power to advance the capital to them at an earlier date, if funds were required, for example, for university tuition fees. An IPDI is treated differently for inheritance tax purposes and is not subject to the additional inheritance tax charges which apply to most trusts — although, under current rules, capital gains tax would be payable when each grandchild becomes entitled to the capital.

Laura Kearns, a solicitor at Royds Withy King, says it is very common for parents and indeed grandparents to have concerns about children receiving an inheritance at an age when they may not be sufficiently mature to handle the responsibility. Fortunately, if your mother-in-law has not yet executed her new will there are various options she can consider to minimise the risk of funds being squandered by a financially immature grandchild. 

As a starting point, if no age contingency is specified in the will, each grandchild will be entitled to a one-sixth share of the estate at the age of 18. For those grandchildren under 18 at your mother-in-law’s death, their shares would be held on bare trust by your mother-in-law’s trustees, with the trustees having discretion to make income or capital available to or for the benefit of the grandchildren during their minorities. However, once the grandchildren reach 18, they could call for their inheritance and spend it as they wish.     

If your mother-in-law agrees that 18 is “too young”, she could instead choose to defer the grandchildren’s entitlement to a later age, such as 21 or 25. In these circumstances, the funds would be held in trust for the grandchildren beyond the age of 18 and, depending on how the will is drafted, the trustees could have discretion to make funds available to the grandchildren until they become entitled to their inheritance at the later age.

It would be advisable for your mother-in-law to take professional advice on the best structure as each option has specific, and different, tax implications. A solicitor will be able to explore the options with your mother-in-law and advise her appropriately.

If your mother-in-law has already executed her new will and there is not time for her to amend it, the grandchildren may receive a windfall at the age of 18. Although the value would be theirs to spend as they wish, you could encourage the children to invest the funds in such a manner that they do not have easy access to the money or to make you a joint signatory on their accounts. Though any financial decision would ultimately be theirs, such steps may help to reduce the risk of irresponsible spending.

The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.

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