Estate Planning for Problem Children

For most parents, providing for their children is a fundamental motivation for estate planning. Yet for a growing number of families, the question of how to provide for an adult child is far from straightforward. When a child has a gambling problem, a substance dependency, an unsuitable or unstable relationship, or simply a demonstrated inability to manage money, leaving them an unconditional inheritance may do more harm than good.

This article addresses the estate planning options available to South Australian Will-makers who are concerned about leaving assets to vulnerable or financially unreliable adult children, under the Succession Act 2023 (SA) and related legislation.

Identifying the Problem

An increasing number of parents approaching estate planning solicitors express concerns about one or more of their adult children. Common concerns include:

• Chronic financial mismanagement – the child cannot hold a job, accumulates debt, or is persistently unable to meet ordinary living expenses
• Substance dependency – gambling, alcohol or drug addiction that is likely to consume any inheritance rapidly
• Mental illness – a condition that impairs the child’s capacity to make sound financial decisions
• Business risk – the child runs a business in a high-litigation sector or with significant exposure to personal liability
• An unsuitable or unstable relationship – concern that an inheritance will be transferred, voluntarily or through family law proceedings, to an estranged or unsuitable partner

In each of these situations, an unconditional cash bequest or transfer of real property may prove counter-productive. The parent wishes to provide for the child; the gift, however, may accelerate the child’s difficulties rather than alleviate them.

The Risk of Unconditional Bequests

An unconditional bequest places the inherited assets immediately and completely under the control of the beneficiary. For a financially vulnerable person, this can be catastrophic. A person with a gambling or substance problem may exhaust a substantial inheritance within months. Assets received outright become part of the beneficiary’s personal estate and are therefore available to their creditors, including in bankruptcy proceedings. Assets that are not carefully structured may also become part of the property pool in family law proceedings upon separation or divorce.

The parent’s intention to provide long-term support for their child cannot be achieved if the inheritance is dissipated before it can serve its purpose.

The Testamentary Trust Solution

A testamentary trust, established within the Will under the Succession Act 2023 (SA), is the most versatile and effective tool for protecting an inheritance intended for a vulnerable adult child. Under a testamentary trust:

• The assets are held by a trustee (who may be a professional trustee, another family member, or a corporate trustee) rather than being transferred outright to the child.
• The trustee distributes income or capital to the child in accordance with the terms of the trust – which can be calibrated to provide for the child’s genuine needs without placing a large lump sum at their disposal.
• The trustee has discretion (within the terms of the trust) to withhold distributions in circumstances where a distribution would be harmful – for instance, where the child is in the grip of an acute addiction.
• The trust assets are generally not available to the child’s creditors, because they do not belong to the child – they belong to the trust.

Protection from Relationship Breakdown

A properly structured testamentary trust can also protect an inheritance from the consequences of a relationship breakdown. Assets held in a testamentary trust do not form part of the beneficiary’s personal property, and are generally not included in the property pool for family law purposes. If a child separates from a partner, the trust assets should remain intact for the child’s benefit, rather than being divided between the child and their former spouse or de facto partner.

This is an increasingly important consideration, given the high rates of relationship breakdown in Australia. Even where a parent has no concerns about a child’s financial management, the risk of a future relationship breakdown may justify including testamentary trust provisions in the Will.

Structuring the Trust

The terms of a testamentary trust can be tailored to the specific circumstances of the child and the nature of the parent’s concerns. Options include:

• A fixed distribution schedule – income or capital distributed in regular instalments rather than as a lump sum
• A needs-based trust – distributions made at the trustee’s discretion for specific purposes such as housing, medical expenses, or education
• A protective trust – structured so that the trust falls into protective mode if the child becomes bankrupt or is subject to a sequestration order, ensuring that creditors cannot access the trust assets
• A spendthrift clause – preventing the child from assigning their interest in the trust or charging it as security for a debt

Not Disinheriting, But Protecting

It is important to emphasise that the use of a testamentary trust is not a mechanism for disinheriting a child. On the contrary, it is a mechanism for ensuring that an inheritance achieves its intended purpose – to support and provide for the child – rather than being consumed by the very problems the parent was hoping to alleviate. A well-drafted testamentary trust reflects a parent’s love for a struggling child, not their disapproval.

Separate and apart from the estate planning solution, parents in these situations should also be aware of the family provision provisions of the Succession Act 2023 (SA). An adult child who is not adequately provided for in a Will may apply to the court for a family provision order. The court has wide discretion in these matters, and an application by a financially vulnerable adult child may receive sympathetic consideration. This is another reason why early, comprehensive estate planning advice is essential.

Want to Find Out More?

Genders and Partners has extensive experience helping South Australians with estate planning for families with complex beneficiary needs. Whether you are making a new Will, reviewing an existing one, or seeking advice on a specific estate planning concern, our specialist team is here to assist.

When it comes to Wills, Probate, Deceased Estates, asset protection and estate planning in Australia, you can trust the oldest law firm in South Australia – Genders & Partners – to guide you through the tough decisions to create the best solution for your individual needs.

If you have any questions or would like further information, or a quick phone call to discuss, book a timeslot for a free 15-minute phone consultation.

We can help you to protect yourself and your family. We look forward to being of service.

More Estate Planning Resources

• Wills and Estate Planning FAQs
• What Are Testamentary Trusts?
• How Estate Planning Trusts Can Protect You and Yours
• 7 Things to Consider About Problem Children in Your Will
• Estate Planning for Children with Special Needs
• Expectation Management in Estate Planning

All these and many more estate planning topics are available for discussion with the oldest law firm in South Australia.

DISCLAIMER: This article provides general information about estate planning strategies for parents with concerns about adult children, under the Succession Act 2023 (SA) and related South Australian legislation. It does not constitute legal advice and does not address specific asset protection strategies designed to defeat legitimate creditor claims. Readers should seek advice from a qualified South Australian estate planning practitioner.