I know for a fact that my wife would much rather pick out the decorations for a birthday party than have to make plans for our two boys’ financial future if something were to happen to both of us. No one really wants to think about the future without themselves in it. But when we’re responsible for the lives of others, we don’t really have a choice but to make plans, and hope they never have to be used. If the plan does get used, I want to know that it will work, and that our boys will have great expectations, and not be pleading with Mr. Beadle for more.
When discussing options for life insurance policies, retirement accounts (IRA’s, 401k’s, etc.), and in naming beneficiaries in a will or trust, there are three options, which I’ll take in order of simplicity.
Option 1: Naming The Child Directly, After The Spouse
You can name your children specifically or as a class, for example, “all my children.” This effectively puts the court in charge of the funds until the child reaches adulthood at age 18. The court will appoint a guardian who will manage the funds under the court’s supervision. The formal procedures that the guardian will have to comply with in order to utilize the funds however, make it difficult for the guardian to use the money effectively except for the most obvious needs. Then there is the problem of a teenager being suddenly in possession of a potentially large sum of money.
Option 2: Use an UTMA Designation
With some simple language, the beneficiary designation can specify a custodian to manage the money under the California Uniform Transfer to Minor’s Act. The custodian is free to proceed without the court’s supervision, which can be a good or bad thing, depending on the skills and faithfulness of the custodian. However, aside from relieving some of the burden of the formal procedures a guardian faces from court supervision, the same problem of the custodian’s control terminating upon the child’s 18th birthday applies to UTMA accounts.
Option 3: Use a Trust
A trust is the most complex, but also the most flexible of the three options. The trustee won’t have the formal reporting procedures to the court that restrict a guardian. And in setting up the trust, we can give the trustee specific instructions. And most importantly, we don’t have to terminate the trust when the child reaches adulthood, but can choose from a number of options in paying out the funds for our children’s benefit.
For my wife and I, choosing a trust makes the most sense. Using a number of financial tools, we hope our two boys will be well prepared for college and beyond.