If you are a parent and you have minor children, one of the most important decisions you will have to make in your estate planning documents is who is going to take care of your children if you pass away. In Ohio, if both parents pass away and a child is still under age 18, a guardianship is established.
There are two types of guardianships: (1) a guardianship of the person, and (2) a guardianship of the estate. A guardian of the person is the person that you name to physically take care of your minor children. A guardian of the estate is the person that you name to take care of and manage the money/assets for your minor children. In Ohio, both of these guardianships require court filing until the minor turns age 18.
For a guardianship of the person, there is an annual filing of a simple guardian's report. This guardian's report asks the guardian to describe:
1. Living arrangements of the minor
2. How often the guardian is in contact with the minor (usually daily)
3. Has the guardian observed any major changes in the minor's physical or mental condition during the past year
4. Whether the minor has been seen by a Doctor in the past year
A guardianship of the estate is handled differently. A guardian of the estate must answer to the court for every dollar spent. In fact, if the guardian of the estate wants to use money for the benefit of the minor, then he/she must first apply to the court before spending the money. Additionally, the guardian must file a report with the court annually showing every credit to and disbursement from the account. For disbursements, there must be cancelled checks or receipts to prove that this disbursement was actually made.
One question that typically comes up is if you would want the person taking care of your minor child to also be in charge of the money. In my experience, the answers vary greatly depending on the family situation. Many people tell me that they don't want to have the person physically taking care of their child to have to go ask someone else for money. Others will often tell me that they trust the person they are naming to physically take care of their child, but they like the extra review by a different person to approve the expenses. This latter option serves as a check and balance on the person actually requesting the money.
No matter whether you choose to name the guardian of the person and the estate as a different person or the same person, you should consider reducing the potential costs that would be involved with such a guardianship.
If you set up a revocable living trust, you can have your money held for the child's benefit outside of the court system. I have many clients that do not like the idea of (1) their children getting everything at age 18, and (2) their children receiving everything in one lump sum. A trust can provide resolutions to both of these issues. An example plan might be that the children would receive 1/3 of their inheritance at their age 25, 30, and 35. The thought being that the child might get the first 1/3 and spend it quickly. Then, the child would get the second 1/3, and spend it quickly (but a little less quickly than the first 1/3). They then preserve the last 1/3. Think about yourself. If you were at a young age and a large sum of money came to you, wouldn't you spend it differently than if you received distributions at different ages?
A revocable living trust allows parents to provide for their children to alleviate the above issues. Also, if the money is held in a living trust, then there is no court supervision, or accounting annually to the court. By putting your money in a trust, you are saying that you "trust" your trustee, and you do not need the court to supervise their actions. The trustee can be an individual or a corporate institution. If you have a trust, then the guardian of the estate is eliminated. Instead, you have a guardian of the person that still reports to the court, and a trustee who manages and invests the money for your children until they reach the ages you have set out in the trust.
So, the choices above allow you to have (1) a Will only naming a guardian of the person and a guardian of the estate, or (2) a Will naming a guardian of the person and a Trust naming a Trustee to maintain the money. Whichever type of plan you choose, the most important decision you will make is who to name in each of these positions. The worst action you can take is no action. No action allows the court to decide who is going to watch out for your children when you cannot.