Question

We have just had our first child and want to update our will. Are there any special issues should we look out for?

Answer

The first thing you should consider is what would happen to your child should both of you pass away at the same time?

If you do not make alternative arrangements, your child’s inheritance will go into the Guardians Fund until he or she turns 18.  This fund is administered by the public investment corporation end currently gives a return of 4.25% a year.  This is less the current inflation rate which is not ideal.

The way to avoid this is to make provision for a testamentary trust in your will.   Should both parents pass away, a trust will be created to look after your child. There are several advantages here:

• the funds can be invested in such a way that the assets should grow by more than the inflation rate and ensure that your child is adequately looked after now and in the future
• any drawdowns for the maintenance and education of the child may be more easily dealt within the testamentary trust. In the guardian’s fund, there are restrictions as to how much you may withdraw from the fund
• you may keep the trust going so the child is older than 18. Giving an impressionable 18-year-old a large inheritance may result in the child spending the money unwisely. A testamentary trust can be structure to run to the age of 21, 25 or even 30.

You should nominate a guardian for your child and name that person in your will.  Please remember to check with the proposed guardian that he or she is in fact prepared to act in that capacity.  You should also nominate alternate guardians should the nominated guardian not be available.

The guardian will be responsible for the child’s future care and well-being. By nominating the guardian in your will, you will remove potential family squabbles as to who will take care of your child should both of you pass away. These squabbles are never in the best interest of your child.

You should also give some thought as to whether you have sufficient assets to look after your child if you and your spouse pass away simultaneously. I would recommend that you consider taking out life assurance that would pay out an annual amount each year until your child reaches a milestone age like 25.  This will make it easy for the guardians to manage the cash flow needed to look after your child. It will also help prevent a potential danger of entrusting a large amount of money to someone who may not be skilled in managing cash flows and budgeting.  I have also found these life insurances that pay out an annual amount to be quite a bit cheaper than those that pay out a large lump sum up front.

You must remember to look at your will whenever you do your annual financial review and check that the arrangements you have made for your children are still appropriate.