Deciding on a guardian for your minor children may very well be the most vexing decision you'll make regarding your estate planning.  Not only must you trust the appointed guardian to raise your children as you'd want them raised, but you also need that person to be financially responsible with your children's inheritance.  For example, if you have an IRA or an annuity that you wish to pass to your minor children, how can you ensure those funds will be used properly—especially if the person you trust most to raise your kids isn't necessarily the best with finances?

This question is multifaceted, so let's survey one aspect at a time.

The Question of Guardianship

The good news is the person who raises your minor children and the person who handles their inheritance do not have to be the same person.  You can appoint one guardian to serve each function, naming one as the guardian of the person and another as the guardian of the estate.  In this arrangement, you entrust one person with your children's assets and another with their care, while enabling each to interact with the other.  This dual guardianship model gives many parents peace of mind—knowing they are not risking their children's inheritance to ensure that they are raised according to the family's values.

While guardianship of the estate can be a good option, for many families the best strategy for financially providing for the children is to use a trust.  In that case, a trustee fulfills the responsibility that would otherwise belong to the guardian of the estate.  The trust assets can be released to the children or the caregiver incrementally according to age and needs.  For example, the trustee could distribute money for the children's needs until age 18 and then manage the remaining assets until the child is a financially mature adult.  Your trustee may also exercise discretion in investing and distributing the funds for the children's support, education, etc., coordinating with their physical guardian to ensure the children's needs are met until they come of age.  This can ensure that funds are there when they are needed for your family.

How Can I Pass On an Annuity to My Children?

Annuities pay out regular income—which can make them convenient vehicles to cover ongoing expenses for minor children.  If you have set up an annuity for yourself or a spouse, you can name your children as beneficiaries, or you can also name a trust for the benefit of your children.  If you are still paying into the annuity at the time of death, your children may receive the balance, or you may give a trustee the option of rolling the balance into another annuity to be paid out to the children at a later maturity date.  If you are already receiving annuity payments yourself, the children may simply continue receiving these payments for the remainder of the term.  Depending on your annuity contract, payouts may also be made as a lump sum. Annuities are a very flexible financial product with many different options.  If you have an annuity now, or if you are considering purchasing one, let us know so that we can make sure it interconnects with your will or trust seamlessly.

Can I Transfer an IRA to My Children?

Individual Retirement Accounts (IRAs) are also excellent vehicles to pass along wealth for minor children's welfare.  Unlike most annuities, IRAs have the ability to grow over time and—even with the 2020 SECURE Act's elimination of the “stretch” IRA—may provide a significant financial benefit to your children.  To transfer an IRA to your child upon your death, you will name them – or your trust – as the beneficiary.  In doing so, you effectively extend the IRA's life expectancy.  Your financial and tax advisor can evaluate your situation to help you decide which type of IRA (Roth or traditional) is the best option for your goals.

Planning for the welfare of minor children after your death is neither simple nor pleasant to consider, but it's absolutely necessary for peace of mind.  Determining the right person(s) to be the guardian of your children requires careful thought, but you don't have to sacrifice your children's inheritance for their proper care.  With the right financial plan, you can manage both facets successfully.  We're here to provide assistance and explain your options.  Contact us or call our offices to schedule an appointment.

Also available on our blog:  5 Things New Parents Need to Know About Wills and Estate Planning for Blended Families

Have general estate planning questions?  Start with Estate Planning Basics & Benefits!

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Posted by Jim Foster

Jim Foster