Inheritance for a Minor

[Edge of Reason]

I'm not sure if this is the right forum category. Can the admin please move it if it isn't.

We are looking for advice. We have two children that are in their mid teens. We have raised them to be the best they can with their money. As parents, we are quite frugal. We drive one car, live in the smallest house in the best subdivision we could afford, eat out rarely, pack lunches daily, vacations are really cheap and we have only taken 2 big vacations in their lifetime (that involved planes etc.).

We have saved like crazy over our working lifetime and other than a gift of $60K (from my parents when we bought our house) the rest of our money is our own. We pay cash for everything (except for our house which was paid off in 7 years) and hope our children will do the same. We have also saved enough for their first degree (they don't know) should they wish to go to college/university and will support them both financially as there is a good university in our home town. Should they wish to go away for education they will need to pay the difference and we will do our best to not encourage that option. We can technically FIRE but both plan on spending up to 10 more years in the workforce. We (as parents) know that we are very fortunate.

Both kids started work last year and they were told that we would support their work (and drive them to and from) as long as they kept their grades up and saved at least 60% of their earnings for long term future expenses (a house/car etc.). They are pretty good in the saving department but still have lots to learn. 

Unbeknownst to them, and a curve ball in our financial plan, they are about to receive an inheritance. We were surprised that this wealth existed in the family as the amount is significant. The money will be given by the estate to my husband (3 deposits in his name) but is earmarked for them. He plans on doubling the amount that was given to them (from the amount given him) so each child will receive an amount just shy of 6 figures. We would rather the kids NOT know the amount of the inheritance as we want them to learn the value of earning and spending their own money (wants vs needs).We are now looking for a way to "store" their money until they need it.

Neither are the age of majority and won't be for at least 2 years. We are not looking to invest in high risk items as this money is really "just in case" money at this time. We would educate them on investment options and allow them to make their own risk choices when they are older. We are considering investing it on their behalf (in our name) until they are done their first degree (or 22 years old should they not go to school after high school). Another option is an informal trust account but they would get full control at age 19.

So my question is this: When should we tell them about the inheritance? Do you have trust accounts for your children? Did you need to engage a lawyer to open them? Have they worked out? Do you have a better idea? We live in Canada if this makes any difference.

I have asked our bank for options but I know they will look (greedily) at this inheritance and do the best for the bank (and not for us/the kids).

Looking forward to your input.

[marty998]

I'd tell them, but not hand it over just yet. I am not a parent but I reckon you should not underestimate the possibility of a "WTF are you hiding MY money from me for?!?!" argument when they do discover you've been sitting on a secret. That can ruin a relationship pretty quickly.

Cash is also the best vehicle here. In some respects it is useful to get them comfortable "having money in the bank". So many people have the "OMG cash! Must spend it now!" mindset. Having it sit there for a while will train the brain(s) to not go out and blow it.

I'd also let them know when you intend on letting them access it, at which point they will need to have researched suitable investment options and chosen their poison - shares or realestate, or a combination of both.

I agree with full control only after 22. I started investing (with my own money) at 19... too young and thought I knew it all. I didn't, fucked it up. Learned a few expensive lessons. By 22 had figured it out (largely because I started working in the financial industry), but everyone is different.

[ginjaninja]

I'd tell them, but not hand it over just yet. I am not a parent but I reckon you should not underestimate the possibility of a "WTF are you hiding MY money from me for?!?!" argument when they do discover you've been sitting on a secret. That can ruin a relationship pretty quickly.

I would disagree with you Marty only because of the specific scenario.  Let me elaborate:

Scenario 1: my friend's mom would take money out of her bank account when she saw it getting too big.  Her logic was that she didn't want her daughter to blow the money on something stupid.  The problem was she never shared with her what was happening to the money, it is just in some bank account in la la land that has a bigger interest rate.  I would be PO'ed if this was the case because the money is something that I FING EARNED.  IT IS MY MONEY! therefore I should have control over it.  In this situation I totally 100% agree with you that "WTF are you hiding MY money from me for?!?!"

Scenario 2: The OP's situation of inheritance.  The kids did not earn the money, therefore, they don't even see it as MY money yet.  Any point that OP's kids get this money it is going to feel like a huge gift and a wonderful thing, regardless of if the parents withhold the information for a couple more years.   I will throw the caviot here is that OP knows their kids way better than anyone else, so if Edge of Reason feels that the kids can handle the responsibility and understand the opportunity then go for it and tell them.  I think this is very dependent on the relationship in the family.

[Sibley]

I would first make sure of the legal details here, because they could change your plans a lot. Legally you can't just give a ton of money to a minor, so there's various ways around it. It may be as simple as you make it sound, but you don't want to assume and find out later you messed up. If the money has to go into an UTMA account there are specific legal rules that will dictate a lot of when they have access, etc.

Regarding what to do with the money - you need to inform your kids. If you don't, it could be a major relationship killer when they find out. You also need to make sure you're teaching them about budgeting, and in general how to be an adult. There's a thread in the Mini MMM section about how to teach kids to adult, and you might want to check that out. If they're mid-teens there's a lot of life skills they should be learning so that in a few years when they're adults they're not screwed.

They're also old enough to think about what they would do with a bunch of money. Start having those conversations. Yeah, the first answer might be they'd buy something fancy and unneeded, but plant the seeds and allow them time to think. Talk about it with them. Not necessarily in a sit down family meeting way, but more in a 10 minutes in the car on the way to practice way.

[Legal Eagle]

Why don't you tell them about it and let them use it to pay for college?  Then keep your money that you saved for college and dole it out to them as you see fit for other life incidentals in the future should they need it?  Just because you saved your money for their college doesn't mean that you can't change your mind now that this windfall has occurred.  For example, if they get college scholarships, my guess is you won't just cut them a check for the savings on the college bill.  I'm sure the party who left it to them probably would have wanted it to be used for something exactly like college, so the money is being used consistent with their wishes either way.

Even though it sounds like your kids are responsible and you're teaching them the right things, there's still a pretty high likelihood that this scenario ends with you paying for college and that money still being gone by the end of it.  Even good kids are bad with money.  Especially money they didn't have to earn themselves.  And I bet old Grandma Sue or whoever saved all this up would probably be just fine knowing that it paid to educate the grandkids.   

[Prairie Stash]

Why don't you tell them about it and let them use it to pay for college?  Then keep your money that you saved for college and dole it out to them as you see fit for other life incidentals in the future should they need it? 

That's worth expanding upon and thinking through more. If you have the university savings in a RESP, the taxes are accruing to them. If you have the inheritance (but in your name?) are you paying the taxes? If you use it sooner to pay for school it should cut down your tax bill and theirs, which may preserve more of the total.

Tell them some is for their future house, much like you got $60,000, the rest is university. It seems fair that they should get a house downpayment like you did, by the time those two big ticket items are paid for there won't be anything left of the inheritance. Explaining how fast the money will be gone is helpful, life is expensive and you can use this as a teaching tool.

Back to the RESP. We had a long thread about RESP's in Canada on this forum, you can reclaim all the principle you put in and just give them the gains and government matches, for the regular family it means you have far more control of the money than is often realized. You have far more options here to avoid taxes then the bank may tell you, I find not paying extra in taxes a great way to grow my money ;)

[secondcor521]

The real problem, OP - and I think you're beginning to realize it - is that parents want to protect their children forever and there are really only two ways to do it.

First, you can try to protect them their entire lives, which usually eventually involves excessively controlling them, worrying about them, and lots of boundary issues.  Second, you can try to teach them and train them in what they need to know to protect themselves and gradually loosen the parental reins, which usually eventually involves crossing ones fingers or praying to a deity and realizing that our kids end up deciding differently than we would and realizing that there is some uncontrollable risk in life and a bad thing or three might befall our kids even though everyone's doing their best to avoid that.

The difficulty is if one stays in the first camp too long, one can really stunt or delay a child's development and growth and it can be practically hard to switch to the second camp.  Ideally, one gradually moves from the first camp to the second camp as the kid appears to be able to handle it, with some grace for mistakes, because we all make mistakes and mostly we survive them and make fewer big ones over time.

The advice I was given and try to follow too is that there are really very few mistakes that are non-recoverable:  suicide, teen pregnancy, self-harm, maybe early marriage/divorce.  Going to a wrong college or wasting $10K or something is fixable.

Yes, it's scary but there is tremendous joy and pride in seeing our kids truly take flight and develop into their own version of adults.  If one is lucky, one can also end up having their adult kids be friends and relate to them as adults, which is also really great.

We started off in the first camp for two long with our oldest.  We moved to camp two with him pretty rapidly when he went off to college and things didn't go very well.  There are other confounding variables with him so it may not have all been due to parenting and things didn't go disastrously wrong.  I am still trying to correct my mistakes there.  We have done better with the second and third, and they are really doing pretty darn well if I do say so myself.

If it's truly their money, then IMHO you need to teach them the options for how to handle it, along with your advice and recommendations:  "Hey Joey, Grandpa Fred left you $100K.  We think it would be really wise of you to use that to go to college and get a marketable degree.  But it truly is your money and we will love you no matter what."  Mentally prepare yourself for them to waste some of it and/or decide to use it in a way that is still acceptable and legal but not what you would have chosen.  Let go and watch your children fly free (or bump along the ground a bit with a small possibility of a crash on takeoff but probably not since they came from a good home and were raised well and were given the resources and tools to succeed).

Good luck.

[TVRodriguez]

First, as an estate planning attorney, I would first make sure about how the bequest was made.  You say it is "ear-marked," but that raises the question for me of whether it was left to your husband in trust for the children or whether it was left to him with the "hope" that the children would benefit.  There is a legal difference.  Now, I'm not in Canada, but we have a similar English common law heritage.

In my U.S. state, if it was actually left in trust for the children, then each child (as a qualified beneficiary of a trust) must be notified of the trust and its terms unless there is a designated beneficiary who can accept information on the others' behalf. 

If it was not left in trust for the children but was instead left to your husband, perhaps with a letter of wishes or with the express "hope" that he uses it for the kids, then most likely it's legally his.  And then you can decide how and when to apply it for them and how and when to tell them.

[Drole]

A lot just depends on your kids.  My sister and I each had money for college set aside in our names by our parents.  Way back then, access was through my father's broker....none of this easy online access.  I still have some of that $....my sister went on cruises and the like. 

[Laura33]

First, check with a lawyer to confirm you fully understand what you have to do.

Second, although I hate the term, this is a perfect “teaching opportunity.”  You are raising kids who have certain financial privileges in life, like parents who are saving for their college, and relatives who can leave them five-figure inheritances.  These are all awesome things.  But your job is to raise kids who are prepared to live in your world — so if that world includes those financial privileges, then you need to introduce your kids to those things while they are young and under your influence so that they can learn to manage it responsibly.  So, for ex, you can talk to your kids about the relative, and the kinds of values s/he had, and how s/he loved the kids so much s/he wanted to help the kids get a leg up on life.  You can discuss how the money is a tremendous gift, but that along with that gift comes the responsibility to use it wisely, because it would be disrespectful and beneath them to throw away someone’s life savings, and so over the next few years they can think about what might be a good way to use the money to set them up for their future.  And then you can have conversations over time about what the kids are thinking, and softly nudge them in the “right” direction.

Major changes and surprises are always stressful, even when they are good surprises.  And that stress can lead to spur-of-the-moment poor decisions (just look at all the lottery winners who go broke, or the widows who sell the house immediately and regret it for years after).  When you give people time to think and plan and prepare, they are not acting under the sway of powerful emotions, and so are more likely to make a thoughtful decision when the time comes.

[AMandM]

First, as an estate planning attorney, I would first make sure about how the bequest was made.  You say it is "ear-marked," but that raises the question for me of whether it was left to your husband in trust for the children or whether it was left to him with the "hope" that the children would benefit.  There is a legal difference.  Now, I'm not in Canada, but we have a similar English common law heritage.

If the OP is in Quebec you don't; there it's the code napoleonique. :-)

[msanne]

If the money was an inheritance for children you may be legally obligated to have a public trustee.  This is the case for my son as he was left a decent sum from my mother's estate.  Once a year I have to show that it is indeed still invested and not being spent. When he turns 18 he will deal with it. I will have no say as he will be an adult and it is his.   If the money was not left in your children's names but rather your husbands, then it is up to him to decide what is the best way to deal with this.
If you have raised your children with a good knowledge of finances they should be fine to deal with this money when they are young adults.

[TVRodriguez]

First, as an estate planning attorney, I would first make sure about how the bequest was made.  You say it is "ear-marked," but that raises the question for me of whether it was left to your husband in trust for the children or whether it was left to him with the "hope" that the children would benefit.  There is a legal difference.  Now, I'm not in Canada, but we have a similar English common law heritage.

If the OP is in Quebec you don't; there it's the code napoleonique. :-)

Haha, good point!  Louisiana is weird like that, too.  Civil code in a sea of Common Law!

[Ananas]

I received an inheritance when I was 17, since my mom died in a car accident although it took til I was about 19 for money to be disbursed from the estate. It was a mid 6-figure sum in USD/EUR, so it was not insignificant, in addition me and my sibling received stock in the family company. Basically my dad arranged a meeting with a financial planner, who went through the basics with me and my sibling. After that we spent a lot of time talking things over with my dad and coming to an agreement with how to use that capital etc. For my part I bought an apartment, where I was going to study and a reasonable car. This was back in the year 2000.  The stock for our family company was left in the estate, since estates are taxed favorably regarding dividends etc in Finland at the time.

I think the most important part is getting your kids ready for this money and teaching how much it can change their lives in the long run, rather than buying stupid shit in the short run. Stuff like an apartment near their university or otherwise, is pretty concrete. Start teaching them about investments and compound interest etc. Financial literacy classes might be a good idea. If your kids read stuff then books like your money or your life, or rich dad poor dad etc.

I have done very well in the next 18 years and I'm almost to FI, without really planning it (36 now and should be fully FI when I hit 40). This inheritance helped me along the way considerably, due to compound interest. Later on I bought 3 rental apartments with capital that was left over when I changed apartments to a cheaper area. A few years back I bought 3 more apartments and am in the process of buying 2 more. On top of that I have a very significant investment portfolio that has grown over the years.  Had I been very savvy financially and known about FI/RE I would probably already have been FI by now, by leveraging rental apartments during the last downturn, but I was too busy doing other important shit (tm), like studying and traveling.

[Goldielocks]

My first thought was the same as the others.   From how you describe it,  if the money is given to you directly, then it is not actually the kids'.  If you are to be a trustee of the money, there should be instructions given to you.

So, go check the facts.

One option is to buy a 10 year bond with it.  There is not much tax as the interest on bonds is low, so taxation worries are minor, and bonds are typically allowed investments for money held in trust.  It would be completely held aside and separate and you don't need to set up another account (possibly with a fee).  It would also reduce the ability of kids to get a hold of it as soon as they are no longer minors.  (even if redeemable, it would take work and most kids would not figure it out.)

[nancyjnelson]

As other commenters have already stated so well, check the facts and the actual legal framework is first.

Don't hide the money from the kids - they will resent your being sneaky.  Do find financial courses - maybe one a year - that they should take. Your kids need to learn about investing, ROIs, compound interest, charities, and what are the benchmarks to use whether their money is being used for good or is just being wasted. 

Because money isn't just about getting stuff, it's also a responsibility.