Most parents, at one time or another, give serious thought to what would happen to their children in the unhappy - and very unlikely - event that one or both parents die prematurely. Who would raise the children? Would they have enough money - and who would manage it for them until they became adults?

Married folks often leave property to each other with the understanding that the survivor will care for the children. They name their children as alternate beneficiaries. Many single parents, however, leave property directly to their children.

Either way, you're not done when you've made your children the beneficiaries of your will. You should also arrange for someone to manage whatever property they 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.

Except for property of little value, the law requires that an adult manage property inherited by minors until they turn 18. If you don't arrange for property management, the probate court will do it for you by appointing someone to serve as " property guardian." Surprisingly, the other parent is not automatically the property guardian, although the court may appoint him or her. Usually, a court-appointed guardian must make frequent reports to the court and has limited authority to decide how the property should be managed.

Even if your children are over 18 - and thus legally allowed to manage the property they inherit - you may want to impose some controls. You can do that, within limits, in your will or living trust.

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 - by naming someone to manage property inherited by minors and young adults. There are many ways to structure this arrangement; here are four of the simplest and most useful.

1. Name a Custodian Under the Uniform Transfers to Minors Act

The Uniform Transfers to Minors Act (UTMA) is a law that has been adopted in substantially the same form in almost every state. (The holdouts are South Carolina and Vermont.) 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. 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, an UTMA custodianship ends when the beneficiary is 21. (A few states end them at 18; Alaska, California and Nevada allow the age to be extended to 25.) If you don't want the beneficiary to get the property so soon, you may want to use a trust (discussed below) instead.

2. Set Up a Trust for Each Child

A second 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; 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 is 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 other document authorizing the trust, 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 an UTMA custodian, however, are set out by state statute. Most banks and other institutions are familiar with them and know what authority custodians have.

3. Set Up a " Pot Trust" for Your Children

If you have young children, you may want to set up just one trust for all of them. This arrangement is called a pot 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 provides great flexibility for 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.

Example: Nick and Nora have three children, ages 4, 5 and 10. In their wills, Nick and Nora each leave everything to each other, and name the children as alternates. If both parents die and the children inherit everything, Nick and Nora's wills provide that one pot trust will be set up for all the property. The trustee, Nora's sister Chloë , will be responsible for managing the assets in the trust and spending trust money for the children in whatever amounts she decides are warranted.

Nick and Nora pick a pot trust, rather than three individual trusts, because they figure that the oldest child will need more money sooner than the other two. They don't want Chloë limited to spending the same amount of money on each child. Another consideration is that because the children are young, a trust could last a long time. They don't want to saddle Chloë with the paperwork of administering three separate trusts.

4. Name a Property Guardian

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. 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.

Using Life Insurance to Provide for Children

If you die while your children still need financial support, the money might come from many sources, including:

  • the property you leave behind
  • Social Security survivor's benefits
  • grandparents or other family members, and
  • life insurance policies.

It's wise to look at all these sources - but be cautious when considering high-cost insurance plans.

Some insurance salespeople try to pressure parents into buying expensive life insurance policies by exploiting fears of premature death. These pitches are best viewed with skepticism. If you are wealthy (or have affluent relatives who will step forward if necessary), you need little or no life insurance. And if, like most folks, you're struggling to pay for your car's brake job or your kid's braces, you can't afford to (and shouldn't) divert much of your current income to cope with the fairly remote possibility that you may die prematurely.

Specifically, avoid expensive cash value life insurance (whole life, universal life, variable life) policies that offer a lump sum after a certain period of time (20 or 30 years, for example) or after you reach a certain age (often 65). This lump sum payment is sold as a savings feature; it does nothing to affect how much money will be available to your child if you die in the next few years.

If you're reasonably young and reasonably healthy, consider purchasing a moderate amount of term insurance, which is much cheaper than cash-value policies. It will provide quick cash for your children if necessary, without draining your bank account now. Term insurance is pure insurance protection, comparable to auto or homeowner's policies. If you die, the death benefit is paid. If you don't die, you are out the money spent on insurance - but thankful!

Premiums for the same type of policy vary widely; shop around before you buy. Several services will compare prices from many different companies for you free of charge; they advertise in newspapers and personal finance magazines.

Copyright 1999 Inc.