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Case study: Investing a legacy for a minor

Picture of Helen O'Hagan from PrudentialInvesting a legacy on behalf of a child can be problematic because minors are too young to legally contract. Helen O’Hagan discusses the options.

Neil’s daughter, Erin, who is four years old, has been left a legacy of £30,000 from granny Margaret who recently passed away. Erin has her own bank account where Neil puts away birthday money and Christmas money for her and at the moment she has more than £4,000.

Neil is unsure of how to invest all of these funds for Erin and is considering asking the executor to pay the funds directly into Erin’s savings account.

The solution

Neil contacts his financial adviser who informs him that the legacy monies should not be paid directly into Erin’s account. He states that as Erin is a minor child she is unable to legally contract. This means the monies would be frozen in her account and unable to be invested.

Tony Wickenden: A lesson in investing for children

Neil wants to invest the funds on her behalf to maximise growth and provide her with a nest egg for the future.

Paper chain family held up to sunsetHe already has an investment bond of his own and is keen to invest in a similar asset for Erin. His adviser tells him that most insurance companies will not accept funds from an account held by a minor child, nor can a minor child be the owner of a life assurance bond.

Neil asks his adviser if he can just take the monies out of her account, make the investment himself and write this into trust for her. However, his adviser says that he cannot do this as Erin is not old enough to make a gift to him, nor is Neil able to create a trust and settle monies that do not belong to him.

His adviser tells him that the first thing to do is to speak to the executor who is holding the funds pending distribution in accordance with the will.

Normally the funds are held by a solicitor in their ‘client account’. The executor can then analyse the will to see if there is already a trust created within its wording. If there is, the trustees of the will can make an application to the insurance company so that the investment can be made.

Tony Wickenden: Keeping control over children’s investments

If there is not a trust and the will is worded in such a way that it just leaves the £30,000 to Erin, the executor can appoint trustees to hold the legacy until Erin reaches the age of 18. The trustees can then invest the monies on her behalf. In this case, it makes sense for Neil to be appointed as one of the trustees.

Another option is for the executor to retain Erin’s legacy and invest it, on her behalf, until she reaches her 18th birthday. Neil is not comfortable with this route as he doesn’t know the executor very well and he wants to be in control of the funds himself. He is not keen for the executor to act as a trustee and be in charge of Erin’s money.

A final option is for the executor to arrange for the funds to be discharged to Neil as the parent/guardian of Erin to hold on her behalf until she reaches 18. Normally the executor will obtain valid receipt in these circumstances but will have to monitor the use of the money until Erin receives the funds.

After discussion with his adviser Neil decides to ask the executor to appoint him as a trustee in order that he can retain control of Erin’s money and invest it for her until she reaches 18. Normally the insurance company will require a copy of the will and probate, the appointment of trustee paperwork and the relevant application form to proceed.

Neil cannot add the monies already sitting in Erin’s account as these funds cannot be mixed with the trust monies from the will.

Helen O’Hagan is technical manager at Prudential


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