Happy 18th birthday! Now what? Six points to consider when your children turn 18
Our recent article discussed some important issues for those with children under 18 (available here). Now we consider those whose children are reaching adulthood.
Turning 18 is a fundamental milestone in every person’s life. At this age, you are legally considered to be an ‘adult’ and may now (amongst other things) vote, own property, get a credit card, undertake jury service and get married.
While this presents a range of new opportunities for the young adult, it also raises a number of considerations for their parents regarding their family estate and succession planning. We briefly summarise some key considerations below.
1. Bare Trusts & Gifts
Individuals often make lifetime gifts to their children or grandchildren while they are under the age of 18. This may include cash paid into a junior ISA / savings account (e.g. to assist with future university fees or a house deposit), an investment portfolio, shares in a Family Investment Company or an interest in a residential property (e.g. if the parents have taken advantage of the Shared Ownership Exemption).
Where gifts are made outright (i.e. the assets are not held in a formal trust structure) they are held on bare trust. As a result, while the beneficiary is under the age of 18, the bare trustees (usually the parents) manage the assets on their behalf. However, once the beneficiary attains the age of 18, they are entitled to take full control of the assets and ask for them to be transferred into their sole name, to be used as they choose. The bare trustees are under an obligation to inform the beneficiaries of the existence of the bare trust and may not withhold this information until the child is deemed to be more responsible.
It is therefore important for the bare trustees to sit down with the beneficiary in advance of their 18th birthday to discuss the bare trust arrangement and decide how it should be administered. It can be helpful to have a handover period, during which the bare trustees involve the beneficiary in the decision-making process to help prepare them for outright ownership, particularly for more complex assets (e.g. shares with voting rights). However, while many 18-year-olds are happy to leave the assets with the trustees and follow their advice, this is not always the case and early conversations can help to avoid assets being misused.
Once individuals attain the age of 18, they may legally prepare a Will. While this is deemed unnecessary by many at such a young age, it ensures that assets pass as intended (and not under the intestacy rules), which is particularly important where significant gifts have already been made. Wills for younger people are usually very straightforward to prepare and can be put in place relatively quickly as they don’t usually need to consider some of the more complex issues, such as the appointment of guardians. Preparing Wills also helps to develop good practice from an early age and serves as a useful building block for the future when circumstances change (e.g. cohabitation, marriage, children etc).
A child’s 18th birthday is also a useful juncture for parents to review their own Wills. For example, parents may want to consider whether they would like to appoint their children as executors and trustees, as well as whether the structure of their own Wills remains appropriate. For example, if their existing Wills leave assets to their children outright, they may want to consider increasing the age at which children may benefit (e.g. from 18 to 21) or implementing a trust structure to give their trustees greater control over the timing and manner of any distributions.
3. Lasting Powers of Attorney (LPAs)
It is also prudent to discuss the benefits of preparing LPAs with adult children. LPAs are legal documents that allow an individual to name one or more individuals that they trust to take decisions on their behalf in the event that they lose mental capacity and become incapable of making such decisions themselves. A more detailed explanation of LPAs is available here. These are vital documents to protect against the risks of losing capacity (for example in the event that the young adult were to suffer an accident) and, like Wills, are particularly important where significant lifetime gifts have already been made or inheritance received. Under a Property and Financial Affairs LPA, it is possible for a donor to appoint their attorneys to act as soon as the LPA has been registered (provided that they have the donor’s consent). This can be helpful if the attorneys are also the bare trustees of an existing bare trust and they have agreed that the attorneys will continue to manage the assets beyond the child’s 18th birthday, as well as if the child is away for a prolonged period (e.g. travelling, at university etc).
It may also be a good opportunity for parents to consider whether they would like to appoint their children as attorneys or replacement attorneys of their own LPAs. As explained in our article on Business LPAs, it is possible to have multiple LPAs covering different decisions; parents could therefore appoint their children as attorneys on one LPA for straightforward decisions (e.g. household finances and their main residence), but then prepare a separate LPA dealing with more complex decisions (e.g. their business interests, investment portfolios etc).
4. Cohabitation Agreements and Declarations of Trust
When an adult child moves in with a partner, it is important to ensure that there is clarity regarding the arrangements. It is essential that there is a declaration of trust in relation to any property bought together, setting out the respective interests which both hold in the property. If the the property is owned by one of the occupants alone, their family or a trust, a Cohabitation Agreement can detail the basis on which the parties are living in the home together, agreed financial arrangements and other matters. This can help to curtail the risk of the non-owning party asserting on any future relationship breakdown that they have gained a beneficial interest in the property, for example by contributing financially towards the home, associated outgoings or by doing work to improve it. At best such a claim can cause a headache for the owner of the property and can involve significant legal costs to resolve and at worst the non-owner may also be found to have acquired a valuable interest.
5. Pre-nuptial Agreements
When adult children decide to marry, thought should be given as to whether they should consider entering into a pre-nuptial agreement. These primarily set out a framework for resolving the financial arrangements in the event that the marriage were to break down in the future, but can also support wealth and estate planning arrangements.
Pre-nuptial agreements are much more common in England and Wales than they used to be. They tend to be entered into either where one or both parties have wealth already or where they expect to inherit, be gifted or otherwise receive assets in the future. The agreement can set out how specific assets or types of asset are to be treated and confirm the parties’ common understanding and intentions. This can help to avoid a dispute in the event of a divorce and significantly reduce the costs of resolving the financial arrangements as well as any bitterness.
6. Post-nuptial Agreements
These tend to cover the same sort of issues as pre-nuptial agreements. As the name suggests, they can be entered into at any stage after a marriage. They are often prompted by a particular event such as the birth of a child, death of a relative, receipt of inheritance or gift or sale of a business. Parents intending to share assets with their adult children, either now or in the future, may wish to discuss this with their children.
We often find that the key to the above topics is to have regular conversations with your children as they approach adulthood to ensure that they are informed and prepared, thus placing them in a much better position to make sensible decisions when they turn 18 and beyond.