Protecting Your Kids' Inheritance From an Ex-Spouse's Control

Many separated and divorced parents in BC share the same worry: if I die while the children are young, will my ex end up controlling the money I leave them? The answer depends almost entirely on how your will and beneficiary designations are set up.

BC law separates raising a child from managing a child's money. That gap is where planning works. Here is how the rules operate, where an ex-spouse can come in, and how a trust keeps control with someone you trust.

Raising your children and managing their money are separate jobs

If you die while your children are minors, your ex-spouse will often continue to care for them. Under section 53(3) of the Family Law Act, if a guardian dies without appointing a replacement guardian and the other parent is also a guardian, the surviving parent has all parental responsibilities unless an order says otherwise. Who raises your children after your death is its own topic, covered in our guide to naming a guardian for your children in your will.

The money is a different question. Section 176 says a child's guardian is not, just by being a guardian, a trustee of the child's property or entitled to give a valid receipt for it. Being a parent does not, on its own, give your ex the right to hold an inheritance you leave your child.

What happens to an inheritance left to a minor with no trust

A young child cannot manage an inheritance. If your will, or a beneficiary designation, simply leaves money to a minor, the law has to decide who holds it in the meantime. Under the Family Law Act:

• Small amounts can go to the parent. Section 178 lets a person who owes property to a child deliver it to a guardian who has day-to-day care of the child, if the value is not more than the prescribed amount, currently $10,000. That guardian holds it in trust for the child, but in practice your ex would be managing it.
• Larger amounts need a trustee. Above that limit, the property can be paid to the Public Guardian and Trustee, if it is willing to accept it, or to a trustee appointed by the Supreme Court under section 179.
• Your ex can apply to be that trustee. In deciding whether to appoint someone, the court considers the child's best interests, including the proposed trustee's ability and plan, the personal relationship with the child, and the wishes of the child's guardians. A surviving parent who applies is often a natural candidate.
• Everything is paid out at 19. Under section 181, unless a trust instrument, order or enactment says otherwise, the trustee must hand over the property to the child at 19.

None of these outcomes is necessarily what you would have chosen, and none of them keeps your ex at a distance if that is what you want.

The answer: a trust in your will with a trustee you choose

A testamentary trust is a set of instructions in your will that holds your children's share until conditions you set are met. It lets you decide:

• Who manages the money. You name the trustee, and a backup. It can be a sibling, a trusted friend, or a trust company. It does not have to be the person raising your children.
• What the money is for. Many parents allow payments for health, education and day-to-day support, and let the trustee pay schools, camps or landlords directly rather than handing cash to the other parent.
• When your children receive it. You can keep money in trust past 19 and release it in stages, for example at 25, or later if you prefer.
• How the trustee reports. You can require regular accounts, or ask that a second person be informed.

Because the money is already held by a trustee you named, there is no gap for a court to fill with a section 179 appointment. Our article on leaving an inheritance to minor children in BC explains how these trusts are structured generally.

Check your old will and your designations after separation

Separation changes your existing will more than many people realise. Under section 56 of the Wills, Estates and Succession Act, if you and your spouse cease to be spouses after you make your will, a gift to that spouse and their appointment as executor or trustee are revoked, unless your will shows a contrary intention. For married spouses, that happens on an event that gives rise to an interest in family property, which is usually separation. For unmarried partners, it happens when the relationship ends.

That helps, but it is not a plan. If your old will left everything to your spouse with the children as backups, your children may now inherit outright, with the minor-property rules above deciding who manages the money. See our guide to updating your will and beneficiaries after separation.

Beneficiary designations need the same review. Life insurance, RRSPs, RRIFs and TFSAs often pass outside your will. If a child is named directly, the same question arises about who receives the money on the child's behalf. Options include naming a trustee for the child in the designation or directing the proceeds into the trust in your will, each with tax and creditor points to weigh. Our article on RRSP and RRIF beneficiary designations covers the registered-plan side.

Choosing the right trustee

The trustee is the most important decision in this plan. Look for someone who is organised, comfortable with money, likely to outlive you by many years, and able to deal calmly with your ex when needed. Naming two trustees can add a check, though it also means two signatures for every decision. A short letter of wishes, kept with your will, can tell the trustee what you hope the money will do for your children.

Separated with young children? Put your plan in writing

Our wills and estate planning lawyers can review your will and beneficiary designations after separation and prepare a will with a trust for your children, with trustees and terms you choose. If your separation is still ongoing, we can coordinate with your family law file.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.