Can you leave money to an unborn heir?

While it’s common in estate planning to leave money to your children or grandchildren, what if you want to leave funds for a future grandchild, yet to be born? You can do it, but it’s complicated.

Joelle Adelson, an Oakville lawyer who specializes in estate planning, says it’s rare to leave funds to heirs who haven’t been born. But there may be situations — such as if a child is pregnant, and you have reason to fear you may soon die — where you’d want such a plan.

“Most people leave the estate to their children. Some people also leave funds to any grandchildren who are alive at the date of death, even if they’re not alive when the will is prepared, but in my experience it is not a common practice.”

First, your will must define the class of beneficiary (e.g. the grandchildren of X, or the children of Y and Z). There should be no questions surrounding who is included in that class and who is not.

When funds are left in trust to minor children, Adelson adds, you should include a provision in the will that specifies the inheritance must occur within a stipulated amount of time, or that states how long funds must be held in trust.

The will also must account for what would happen to the inheritance if the grandchildren die before they inherit. “If a child does not survive to that time, then [you should specify that] the gift will go to an alternate beneficiary.”

Christie Henderson, managing partner of Henderson Partners, adds the choice of the estate trustee requires great care because the grandchildren could sue those trustees for mismanagement should they feel the trustees didn’t act prudently or diligently when handling the estate’s assets.

Tax: If your spouse dies before you, the estate will be liable for taxes when you die. One option is to buy a life insurance policy with the estate as beneficiary to cover the expected estate taxes.

The 21-year rule, which deems properties are disposed of for estate purposes every two decades, will also cause problems for this plan. Since your grandchildren are unborn, they will face capital gains taxes as beneficiaries shortly after reaching the age of majority—not a comfortable situation for people just beginning to deal with money. And if any beneficiary has not reached the age of majority, the trust will pay the taxes, so the trustees need to manage the estate’s investments properly insuring there’s cash on hand.

Trusts: Canadian estate laws prohibit children from directly inheriting if they’re not considered adults in their provinces. Since your grandchildren haven’t been born, the trustees will have a long-term commitment before the funds can be distributed.

Because it’s difficult to determine the length of time needed to administer the bequests for your grandchildren, paying a corporate trustee might be in your best interest, though it will not be cheap.

“The people managing the trust … should not be in a conflict-of-interest position so they can make an independent decision about how the assets should be managed until the beneficiaries become entitled to it,” adds Henderson.

Further, you must specify if you want to limit access to your grandchildrens’ funds after they become adults, since it can be overwhelming to receive a large sum all at once.

Provincial ages of majority
British Columbia	19
Alberta	18
Saskatchewan	18
Manitoba	18
Ontario	18
Quebec	18
New Brunswick	19
Nova Scotia	19
Prince Edward Island	18
Newfoundland and Labrador	19
Nunavut	19
Northwest Territories	19
Yukon	19

Source: Government of Canada

“[You] can specify when and how much a beneficiary can have—for example, a third of the value at age 25, and two-thirds at age 35,” says Henderson. “Alternatively, [you] can specify how the funds may be used by the beneficiary—for instance, to pay tuition. [You] can also specify whether both principal and income are to be used, or income alone, and how the funds are to be invested.”

Ultimately, it may be more trouble than it’s worth. If you have a good relationship with your children and can trust in their financial responsibility, leaving your assets to them in agreement that they’ll provide certain amounts to your future grandchildren may be the best route.

Lisa MacColl is an Ontario-based financial writer.