Providing for your children in case you die prematurely takes more than picking someone to raise them. You should also consider what will happen to any money or property your children inherit from you. Who will manage it for them until they became adults? The short answer is that you should arrange for someone to manage whatever property they may inherit, in case they receive it while they're still too young to manage it themselves. You can take care of this in your will or living trust.
If you don't arrange for property management for young children (under 18), the probate court will do it for you by appointing someone to serve as the children's "property guardian." The court often appoints the other parent—but not in every case.
This arrangement comes with some headaches. Usually, a court-appointed guardian must make frequent reports to the court and has limited authority to decide how the property should be managed. There's one exception: If relatively small amounts of property are involved, many states allow an executor to appoint a custodian for a minor beneficiary under the Uniform Transfers to Minors Act (discussed below) to manage the property.
Fortunately, it's easy to avoid the uncertainties and hassles of court-appointed guardianship, or the worry that a 20-something beneficiary may not manage an inheritance wisely. You can choose someone, now, to manage any property that your minor or young adult children may someday inherit from you. There are lots of ways to structure this arrangement. Here are four of the simplest and most useful.
If you wish, you can simply use your will to name a property guardian for your child. Then, if at your death your child needs the guardian, the court will appoint the person you chose as property guardian. The property guardian will manage whatever property the child inherits, from you or others, if there's no mechanism (a trust, for example) to handle it.
The Uniform Transfers to Minors Act (UTMA) is a law that has been adopted in substantially the same form in every U.S. state. Under the UTMA, you may choose someone to manage property you are leaving to a child. This person is called a custodian. If you die when the child is still under the age set by your state's law—21, in most states—the custodian will step in to manage the property. (Older offspring get their property outright.)
To set up a custodianship, all you need to do is name a custodian and the property you're leaving to a young person. You can do this in your will or living trust, or when you name a beneficiary for an insurance policy, if you're leaving life insurance proceeds to your kids. For example, your will might state, "I leave $10,000 to Michael Stein, as custodian for Ashley Farben under the Illinois Uniform Transfers to Minors Act." That would be enough to create the custodianship (if it's ever needed).
In most states, a UTMA custodianship ends when the beneficiary is 21. But a few states end them at 18, and a handful allow you to extend the age to 25. If you don't want the beneficiary to get the property so young, you may want to use a trust (discussed below) instead.
Another approach is to establish a trust for each child. With this arrangement, you use your will or living trust to name a trustee (usually a trusted relative or friend), who will handle money or property the child inherits until the child reaches the age you specify. If the beneficiary is already over this age at your death, the trust never comes into being; instead, the property goes straight to the beneficiary.
The trustee must act in the beneficiary's best interests and follow your written instructions. Generally, the trustee can spend trust money for the young person's health, education, and living expenses. When the child reaches the age you specified, the trustee ends the trust and gives whatever is left of the trust property to the beneficiary.
Serving as a trustee is more work than serving as a custodian under the UTMA. For one thing, a trustee must file annual income tax returns for the trust. And because the powers of a trustee are limited to what's allowed in the will or trust document, the trustee may have to show the will (or at least the part of it that outlines the trustee's authority) to banks and others with whom he or she deals. The powers of a UTMA custodian, however, are set out by state statute. Most banks and other institutions are familiar with them and know just what authority custodians have.
If your children might inherit a sizeable amount of money, you might want to delay their inheritance past age 18, since not all 18-year-olds will handle large sums the way you would want. In this case, a trust is the best way to leave the money to a child. One popular way to structure the inheritance is to direct the trustee to give the money in three chunks: one when the kid graduates from college (or turns 22), one a few years later, and the last at around age 30. Until all of the money is distributed, the trustee has authority to use it for the purposes you set out in the trust document: for example, education and healthcare.
If you have young children, you may want to set up just one trust for all of them. This arrangement is often called a pot or family trust. In your will or living trust, you authorize the trust and appoint a trustee, who will have the power to dole out trust money to each of the children. The trustee doesn't have to spend the same amount on each child; instead, the trustee decides what each child needs. When the youngest child reaches a certain age, usually 18, the trust ends.
A pot trust gives great flexibility (and responsibility) to the trustee. Its major drawback is that the older children can't receive their shares of the trust property until the youngest child turns 18; they may not get control over their inheritance until they are well into adulthood.
When deciding on an age for your children to inherit money, consider the amount of the inheritance. If the funds will all be gone by the time your child finishes college, you probably don't need to worry about a long-term plan.
Also consider your child's maturity. Some kids can handle suddenly being given a large amount of money at a young age—but many can't. Foolish spending isn't the only danger; kids who don't know anything about investing can see money slip away. And becoming accustomed to receiving checks—without working for them—can make it harder to learn how to budget and save.
Some parents, worried about their children's judgment, set up management schemes that keep the kids from controlling their money until they're middle-aged (or even older) themselves. Keeping control over money, from beyond the grave, until your child is 40 might breed resentment—not the legacy you want to leave. And paying a trustee to manage money for many years can be expensive. At some point, you have to let go.
If you are ready to write a will or create a trust to protect your children in the event that you die prematurely, get Nolo's Quicken Willmaker & Trust. It provides all the forms you need to protect your family and assets, while saving on legal costs.