When naming minor beneficiaries causes major complications

By Keith Masterman | August 7, 2020 | Last updated on August 7, 2020
4 min read

When your client leaves assets to a minor — either as a beneficiary of the client’s will or a named beneficiary of a registered investment or insurance product — ensure that your client names a trustee and sets out the trustee’s powers to invest and administer the funds.

Leaving money to a minor without naming a trustee can create expense and upset, because minor children are considered parties under a disability and aren’t entitled to receive funds directly.

Therefore, funds left to a child must be received by a trustee on the child’s behalf and invested for the child’s benefit until the age of majority or, if desired, used to purchase an annuity.

A parent isn’t automatically the guardian of a child’s property. When a child inherits as a beneficiary in a will or as a named beneficiary of a registered investment or insurance product, and a trustee isn’t named, the child’s parent or guardian must apply to court to be appointed to manage the child’s property.

The provincial agency mandated to protect minors — for instance, the Office of the Children’s Lawyer, in Ontario — must be served with the application and will respond on the child’s behalf.

The application doesn’t automatically succeed, however. In some cases where the parent or guardian applies, they may be considered to have a conflict of interest if they wish to access the funds to help defray their own obligation to support the child.

If no trustee is named, and the court appoints no guardian for property, the funds will be paid in to court to be managed by a provincial government agency (in Ontario, it is the Accountant of the Superior Court of Justice).

This is likely not the deceased’s preferred outcome, nor does it provide for professional investment advice.

Minors and will planning

A minor may be named as either a legatee or residual beneficiary.

A legatee is a beneficiary entitled to a specific asset or sum of money. Where a legacy is left to a minor, the applicable provincial rules must be reviewed. Some provinces permit a small amount to be paid directly to the minor without the need of a court application. Ontario, for instance, allows up to $10,000 to be directly transferred.

When the legacy is greater than the provincial limit or where the gift is residual to avoid the expense of a court application, a trust should be created as part of an estate plan. The plan should name a trustee, set out the trustee’s power to pay income or capital for or to the minor, establish the age at which the child becomes entitled to the capital, and define the trustee’s investment powers.

Beneficiary designations on investment products

A beneficiary designation for an investment or insurance product typically lacks a will’s formality.

Often, beneficiary forms are signed as part of an employer’s benefits package with no legal or investment consultation. While most forms have a place where a trustee can be named, they differ as to the trustee’s powers, if any. A trustee’s powers are often left to the form’s fine print.

When a form delineates no trustee powers, the form creates a bare trust where the trustee may hold the funds and invest them but can’t pay any amount to or for the minor. A complicating factor is that the form always limits the funds to be held until the age of majority, after which the child is entitled to the funds.

Beneficiary designations don’t have to be made on investment account forms. The terms of any trust can be delineated separately in a standalone document or in a will, often by incorporating the terms by reference to other trust terms set out in the will.

However, a designation in a will has two potential drawbacks.

First, a beneficiary designation will apply only to those plans in existence at the time the will is executed. If other products are purchased after the will is executed, they won’t be included in the terms set out in the will.

Second, an argument could be made that the funds pass through the will and become part of the estate. To ensure this doesn’t happen, some practitioners recommend the terms be repeated as an appendix to the product and not incorporated by reference.

It’s possible to direct the trustee of the registered funds to purchase an annuity for the minor child. Again, this direction or power should be specifically set out. There may be some advantage to purchasing an annuity because RRSP/RRIF proceeds can roll over tax-deferred where the proceeds are used to purchase a fixed-term annuity.

The annuity can provide payments based on a period of not more than 18 years minus the child’s (or grandchild’s) age at the time the annuity is bought. The payments must start no later than one year after purchase and will be taxable as ordinary income to the child in the years received.

While an annuity provides some tax saving, it should be weighed against the desirability of holding the funds and investing them over a longer period. Should the funds be held in a trust, tax will be deferred to age 18 when there will be a deemed disposition.

Gifting funds to a minor, either in a will or as a beneficiary of an investment product, can be complex. Proper legal and investment advice is always a sound place to start the process.

Keith Masterman, LLB, TEP, is vice-president, Tax, Retirement and Estate Planning at CI Investments. He can be reached at kmasterm@ci.com.

Keith Masterman

Keith Masterman, LLB, TEP, is vice-president, Tax, Retirement and Estate Planning at CI Global Asset Management. He can be reached at kmasterm@ci.com.