Franco actually had reinstated the monarchy long before his death. He had done so in 1947 to appease the Carlists faction of Spain; monarchists who supported the Falangists during the civil war. However he had not invited a monarch to hold the crown, making him regent and de facto head of state. In 1961 Franco invited the famous Otto von Habsburg to be king of Spain but he declined and recommended Juan Carlos to rule instead.

So the original reason as to why Franco reinstated the monarchy back in 1947 was to appease the Carlists. However as to why before his death he allowed Juan Carlos to be caudillo instead of appointing another regent, I can't say for sure. I imagine if he hadn't done so there would be significant civil resistance. He didn't dislike Juan Carlos, he had invited him to be king after all. Franco also had no sons, only a daughter.

If I were to cite a main reason why it would be because the institution of the monarchy already existed, it was expected that the monarch would be head of state instead of the regent. And ever since the merger of the Falangists and Carlists party in 1937 restoring the monarchy was a goal of their agenda.