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Nominating Guardians For Kids – And Their Money

Estate planning and parenting have at least one thing in common: Both are about a future that extends beyond your lifetime.

While creating a will is important for all adults, it is even more crucial for parents of minors. Nominating a trustworthy and caring guardian for your children is one of the most important choices you can make on their behalf. While no one likes to reflect on the possible reasons your child may need a guardian, the temptation to avoid such thoughts leads many parents to procrastinate setting up a will that reflects their wishes. Do not fall into this trap.

For parents who die intestate – that is, without a legal will – the court will decide who gets custody of their children. If you die, but your children have a living, biological parent who does not currently have custody, the court will almost always favor that individual if he or she comes forward. For blended families, this can result in the separation of siblings. If your current partner is not the children’s biological parent and has not formally adopted them, courts and states vary as to whether the children will stay with their stepparent or go instead to grandparents, aunts and uncles, or even into foster care. In the absence of a will, the court may create messy custody battles or award custody to a family member who would not have volunteered to raise your children.

If you do not already have a will in place, now is the time; the adage “better late than never” certainly applies. If you drew up a will before having children, you can modify it in order to make your wishes about guardianship binding. Remember that you can always alter your guardian selection in the future, so do not let the fact that circumstances may change keep you from naming someone.

How To Select And Name A Guardian

Think carefully about who will provide your children with a loving and stable home. You know your family and friends best; take serious time to consider not only who you trust, but who is in a position to reasonably take on such responsibility. If you are raising children with a partner or share custody with someone else, you should take the time to have a serious conversation together about who you want as a guardian in case something happens to both of you.

An ideal guardian will have a few qualities beyond being someone you generally trust. For instance:

  • Resources. Does this person have the time to become your children’s primary caretaker? Will they be able to provide sufficient attention and support while your children grow up?
  • Sharing important characteristics. Does this person already have children? If so, do you share a similar parenting philosophy? Does this person share your faith, if that is important to you? What is his or her stance on the importance of academic success? If the person is not family, are they willing to help the children keep in touch with relatives or arrange visits?
  • Location. Do you want to choose someone who lives nearby so your children can remain in the same school system or remain involved in their current social activities?
  • Relationship. How well do your children know this person? If the potential guardian has children of his or her own, how well do the kids get along with one another?

Because every situation is unique, every parent’s decision-making process will be different. For example, you may have a close relationship with your sister – but because she lives across the country, naming her as a guardian would potentially disrupt your children’s lives with an extreme relocation. You might instead select a close family friend who lives nearby. Or perhaps your parents have a close-knit relationship with your children and live nearby, but are declining in health. You might not want to put your children in a situation where they could lose you, followed by their grandparents as guardians, all within their early childhood.

In some families, there can be large age gaps between the children, allowing for a less traditional approach to selecting a guardian. If you have an older child who has already reached adulthood, consider whether he or she is mature enough to take on the role of guardian for your younger children. After all, your adult child has a better understanding of how you would run your household than anyone.

An important note: While good financial management is a useful quality to consider, it need not be a sticking point in guardian selection. Depending on the financial planning techniques you choose, some of which I will discuss in more detail here, you can ensure there are sufficient funds for your children to maintain their current lifestyle, even if the person who will provide them a loving, supportive home is not necessarily a person with extensive money management experience.

Whoever you choose, it is important to talk with your potential guardian. Raising a child is a large and extended responsibility, and not one you want to spring on anyone without warning. Such a conversation will allow the potential guardian to raise any concerns, and it will allow you to discuss your wishes in more detail. If someone declines the role, it is better to know in the planning stages, while you can approach an alternate. You should also do your best not to take it personally if your selected guardian declines. The goal is to secure the best possible care for your children.

Once you have settled on a guardian, you can make your wishes legally binding by naming a guardian for your minor children in your will. Rules vary by state, so be sure to follow requirements closely to ensure your will is legal and valid. These rules typically include things like making sure your will is typed and having it properly signed and dated with two witnesses. In some instances, it can help to have the document notarized. Depending on the complexity of your affairs, it is often wise to hire an attorney.

If you are married, share custody with an ex-partner or both, it is important that all co-parents name the same guardian in their respective wills to avoid complications. You should also select a backup guardian, especially in instances where your primary choice is an older person. Just as with the primary guardian, you should talk with a backup choice before naming him or her in your will.

In addition to a will, you might consider writing a detailed letter of instruction to the guardian, to be delivered in case of your death. This letter can provide a variety of information your children’s guardian will need, such as your children’s medical history or special dietary needs. You might name particular items that hold emotional significance for your children, such as photographs, blankets, toys or other mementos the guardian will want to make sure the children bring to their new home. You can update this letter each year, to ensure it is still accurate regarding your growing and changing children. Remember that the guardian will be grieving your loss as well, and may or may not already be particularly close to your children; your letter might include advice for helping your children cope with their grief, informed by your knowledge of their temperaments and personalities.

Providing For Your Children’s Financial Future

Beyond choosing a guardian, there are several planning techniques that can give you peace of mind about your children’s financial security in the case of your death. Of course you can leave assets to your children directly, but if they are under 18, this means that an adult must oversee the inheritance – either someone you appoint or, failing that, someone that the probate court appoints as a guardian of property. You can also leave property to the children’s guardian with the understanding it is to be used for their care, but this provides no mechanism for ensuring the beneficiary uses the inheritance the way you intend.

Several other options offer more flexibility and more control. An obvious choice is to create a trust for the benefit of your children. If you create the trust prior to your death, the assets can avoid probate court, which can save time and expense. You can also create a trust through your will, called a testamentary trust. Either type of trust allows you to appoint a trustee who is not necessarily your children’s listed guardian. This means you can appoint someone with greater financial savvy who, for one reason or another, is not your choice to actually raise the children.

When setting up your trust, be sure to list a primary trustee and a successor trustee. As with selecting a guardian, it is important to discuss your plans with your potential trustees to make sure they are comfortable taking on the role and that they understand what it entails. Assuming your trustees have never managed trusts before, you will want to cover the basics of what the job includes. Serving as a trustee may involve managing or investing the trust’s assets, handling distributions for the benefit of the trust’s beneficiary and completing administrative duties such as recordkeeping and taxes, or overseeing a professional who handles such work.

Rather than asking a close friend or relative to take on this task, you may want to consider a more experienced independent trustee to oversee your children’s trust or serve as a co-trustee with a friend or relative. This option clearly offers advantages regarding expertise and impartiality. However, you should ensure whomever you add will not complicate the administration of the trust or be inflexible.

Whether you choose a close relation or an independent trustee, the trust document will provide guidance for how you intend the trust to be used. A typical trust might be set up to fund your children’s maintenance, support, education and health care costs. If you have multiple children, you should consider whether you wish to specify how the assets should be divided among them. Depending on your situation, you may wish to set up separate trusts for your children, or it may be more logical to set up one “pot trust” for all of them.

If you set up a trust, you may wish to have the trust purchase a term life insurance policy on you. The life insurance policy can cover the period until your children reach a particular age, whether 18, 21 or 25. By setting up this policy through the trust, you can avoid the problems inherent in naming a beneficiary under the age of 18.

Even if you do not set up a trust, you can name your minor child as a beneficiary of your life insurance policy as long as you also name an adult custodian. The Uniform Transfers to Minors Act, which is often abbreviated UTMA, has been enacted by all states except South Carolina, which uses the older Uniform Gifts to Minors Act. UTMA allows you to name your minor child as the beneficiary of your life insurance policy (as well as a variety of other sorts of gifts or transfers). One potential drawback of directly naming your child a beneficiary under UTMA rules is that the funds will become available at an age specified by state law, often 18 or 21, which may be earlier than you would specify in a trust. Ultimately, the dollar amount of assets involved will often determine whether using a trust is preferable. Given the increased level of control, large amounts are often better transferred by trust.

Education funding also offers another option: a 529 savings plan. Contributions to the plan grow undisturbed and withdrawals are tax-free, as long as the funds are used to pay for qualified educational expenses. You should be sure to name a successor account owner, since the minor child is the beneficiary, not the owner. The successor will take over managing the account in case of your death. This could be the same person you choose to serve as your trustee or another financially responsible individual. A 529 plan can alleviate the potential stress of steep education expenses for your child’s guardian if you die prior to your child completing school.

Parents have all sorts of hopes and plans for their children’s futures, and most of them involve being there to see those hopes come to pass. But planning for the worst-case scenario can bring you peace of mind, knowing that even without you, your children will have a loving home and financial support as they grow into adulthood.

Client Service Manager Melinda Kibler, who is based in our Fort Lauderdale, Florida headquarters, is the author of Chapter 15, “Income Taxes,” in our firm’s most recent book, The High Achiever’s Guide To Wealth. She also contributed several chapters to the firm’s previous book, Looking Ahead: Life, Family, Wealth and Business After 55.