Instead of naming your granddaughter directly, you should provide in the IRA beneficiary form and on the savings account signature card that an adult of your choosing will hold the money for her as custodian under the Texas Uniform Transfers To Minors Act. This way, the money will be held for her without court involvement until she reaches age 21. Alternatively, you can allow the money to pass to a trust for your granddaughter's benefit created under your will. Of course, if you choose to set up a trust, you should meet with an attorney to be certain your will is written properly and that the IRA and savings accounts are coordinated with your will. We have simple wills which leave our entire estate directly to each other.
Income taxes are another issue.
As your children take distributions from your IRA, they must include the distributions in their taxable income and pay taxes at their highest marginal tax bracket. Fortunately, they will not be required to take all distributions in the year that their sole living parent dies. As a general rule, if the surviving parent dies before April 1 of the year after the parent reached 70, the children can choose to take distributions over their life expectancies or to withdraw the account balance over a five-year period. If the surviving parent dies after reaching the April 1 milestone, the length of time the children have to take distributions is very complicated. It depends on a number of factors, including the parent's age at death and method of calculating minimum required distributions.