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At Fleming Financial Services, Inc., our role is to assist our clients in defining and realizing their financial objectives and goals. We work with our clients to implement personalized plans designed for their unique situations. Our areas of concentration are: Retirement planning, Estate and Wealth Transfer strategies, and Business Continuation planning. We emphasize the importance of conducting our business with integrity and professionalism. As a member of PartnersFinancial, an independent national financial services company, we are able to provide access to sophisticated resources for the benefit of our clients. Some of the professionals with our firm are currently registered to conduct business through NFP Securities, Inc. With those additional resources in place, we help facilitate the complex corporate and personal financial decisions our clients must make.

Life Insurance Beneficiary Designation Issues in Divorce - Part 3

Thomas Joseph Thomas Joseph , 1/5/2015
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Fleming Financial Services, PA, Irrevocable TrustChildren as beneficiaries

In general

If there are children involved in your prior marriage, protecting them should be a priority. Much of the reason you purchased life insurance in the first place probably was to protect your children. Divorce may create additional needs, too. The death of the parent responsible for child support payments could have a devastating impact on your children's financial futures. Using life insurance to protect your children is an obvious and practical planning choice. There are a number of different ways to achieve it, however. The options range from the easy (e.g., naming your child as beneficiary of an existing insurance policy) to the more difficult (e.g., setting up a life insurance trust to purchase the policy on your child's behalf). Following are four basic options.

Designate your child as the beneficiary of your existing policy

The easiest way to protect your children is to designate them as the beneficiaries of your existing life insurance policy. Changing the designation is usually easy to do. Upon your death, the proceeds are paid directly to the child you designate. If the childis not old enough to receive the proceeds, a custodial account can be set up to receive the funds on the child's behalf. The first drawback is that the death benefit proceeds paid from your policy are includable in your gross estate at death, which could mean estate tax burdens. Second, it may be difficult for you to make a single designation that accounts for multiple children, especially if there are children of a prior marriage involved. And third, you have no control over how the proceeds are used. Naming a beneficiary merely directs who gets paid.

Purchase an insurance policy on your life in your child's name

As a second option, you can acquire additional insurance on your life in your child's name. This option is slightly more involved, because you may have to go through a medical examination and underwriting. The benefit of purchasing the policy in your child's name is that at the time of your death, the proceeds will not be included in your taxable estate. Any policies you own at the time of your death are considered assets for estate tax purposes. If the child owns the policy, these taxes can be avoided. But note, there may be gift tax implications if you transfer an insurance policy from yourself to your child. When a life insurance policy is transferred from the original insured to a beneficiary, this transaction is deemed a gift and may be subject to gift tax. Caution: In some instances, a child may not be able to be the owner of the policy if he or she is a minor. The age of majority differs from state to state, so check your local jurisdiction. Tip: During your lifetime, you can use theannual gift tax exclusionas a tax-free way to give money to your child. The child can then use this money to pay the premiums for an insurance policy on your life. This will protect your children's future while decreasing your tax burdens. There are drawbacks to this choice. First, you have no real control over how the funds are used. Second, it won't work for minor children. Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2015