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I had exactly this dilemma when we made our wills, when our daughter was a year old.
First, I must respectfully disagree with "blood" over friendship. Our daughter is adopted and I believe that my sister loves her as my child, and not because of a blood relationship.
While my sister and her husband were certainly excellent candidates for guardianship, my friends offered me the future that I would want for my kid. I stood back and asked myself who I would have wanted for parents and it was not even a contest. My friends have the immense capacity to love, great patience, and tremendous acceptance. My sister and brother-in-law could love my child, but I foresaw a future that I would not have wanted for myself. Why would I offer that future to my kid in the event of my husband's and my death? This does not mean I don't love my sister. It only means that my friends offered me a vision of my child's future that worked better for me.
A further note: As I said, my sister and I are very close--so much so that when her first child was born, we discussed the guardianship issue candidly. She wasn't surprised that I had named friends over family as guardians. She had done the same.
To LW: Guardianship is not the same as a will. Bequeathing your estate is an easy choice; guardianship is really tough. You could get your lawyer to draft a separate document, and update it as you need to. Everybody's life will be changing all the time--your sister, your friends. You can't anticipate any of that future, or what it would mean for your kids--you can only make the choice that feels most appropriate at the moment. And adjust it as life unfolds. But the "blood" argument doesn't hold up--it seems like at any given moment you should choose people who will raise your kids in an environment that you would want for them. Won't your family be there for them anyway?
Actually, one of the greatest things about an amicable divorce is that the chances that you will both be killed in an accident become very remote, and so you don't have to worry so much about this issue...
Meet the military man, give him a chance, and then decide whether you find him so repellent. Obviously you trusted your sister's judgement enough to initially give her guardianship - why not give her choice of husband a chance? You might be surprised.
And might it also be a really good idea to ask the friends whether they want to be put in the position of taking on that responsibility? Just because they have their own kids - it doesn't mean they want yours. Double the mouths to feed, double the college expenses - is it financially fair to make your friends your choice?
This was a very hard decision for my husband and me to make as well. Initially we named my older sister and her husband as guardians. Over time as we saw how they parent their two sons, we had doubts about their suitability and asked my good friend and her husband to be named guardian of our daughter. But in the ensuing years, we've had a second child, and our friends have adopted a third. They also live four hours away, and we've seen a lot less of them over the past three years. So we now are changing our guardianship papers to name my younger sister and her husband. She wasn't married when we first had to make a decision, but now she is, to a very kind and decent man. And she's just had her second son, so we can see what kind of parent she is. In the long run, family ties are stronger, certainly for the kind of life-changing obligation this entails.
The LW should get to know the fiance, and see how things go. As my example shows, you can name someone and change your mind later. But as long as she is close to her sister(s), there is a greater likelihood that those bonds will withstand the test of time more than friendships if people move to another part of the country.
I don't think I need a OUIJA board to read between the lines on this letter: You and your husband are liberals. Your sister is about to marry a conservative military religious gun-owner who, unless I miss my guess, voted for Bush and is all "Boo-ya Bush! Here, give the kid a GI Joe Jesus action figure!"
I understand the "Eww, ick" factor, but you have to remember that gun-toting boo-ya! military-brat Jesus-freak Republicans do love their children too. More than that, you have to look at the odds of both you and your husband dying at the same time somewhere between your child's birth and his/her eighteenth birthday, and then take a good hard look at the odds of your sister remaining married to the same man for eighteen years. What's the percentage chance that she'll divorce him? What's the percentage chance that he'll get killed in some war? What's the chance that your absolutely great liberal friends (who you'd be wanting to take care of your kids if you didn't have any relatives) do something you wouldn't like, like finding Jesus, or Bush, or both?
You've got a nice advantage right now in that your sister is not yet married to the guy, so I'd say just draw up your will naming her first, your other sister second, and your good friends third, but with a sensible statement saying that you're entering into this at this particular date and you realize that everyone has their own lives and realities down the road, so you would like all of them to sit down and decide between them what is both best for them and best for the children in the event of your unfortunate demise. Your sister will hardly be offended if you name a second and third choice in your will (and that's also common sense, as any disaster that takes out both you and your husband might have a chance of taking her out as well), and if it turns out that your sister is financially unable to take care of your kids but your friends are, she'd probably like that you thought of her first but she has a graceful out and would be able to simply continue as their doting aunt.