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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 4

Thomas Joseph Thomas Joseph , 2/10/2015
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Tree of lifeLife insurance proceeds and your taxable estate

In general When you die, the life insurance proceeds may be includable in your taxable estate . Generally, life insurance proceeds are includable an estate in the following situations:

• When the proceeds are to be paid to the estate • When the proceeds are receivable for the benefit of the estate • When gifts of the policy have been made within three years of death • When incidents of ownership have been retained in the policy at the time of death

Transfers at divorce and estate taxes Sometimes, the divorce agreement will provide that you must transfer an existing policy to your spouse or that you must name your former spouse as the beneficiary of your policy. A straight transfer of your existing policy to your former spouse, who becomes the policyowner, gives that spouse total control over the beneficiary designation. You are not able to make the designation contingent on, for example, your former spouse's death or remarriage. When the divorce decree requires that you name your former spouse as beneficiary, it could result in increased estate taxes or complicated situations if you attempt to avoid them. If you want to avoid having the proceeds included as part of your taxable estate, you must not retain any "incidents of ownership." Tip: The best way to do this--while at the same time keeping some control over how the proceeds will be used--is to set up an irrevocable life insurance trust. You can fund this trust tax free by using your annual gift tax exclusion. The money you gift to the trust can be used to pay the premiums on the policy. The best part of a trust is that when you set it up, you can designate who will be paid and under what circumstances. To have the proceeds not included in your taxable estate, the trust needs to be irrevocable (i.e., you can't change the beneficiary down the road), and the proceeds cannot be payable to your estate. Tip: Be sure to name alternate beneficiaries (i.e., your children) in case your former spouse dies before you. Only gifts of present interest qualify for the annual gift tax exclusion. The problem is that when you give money to the trust,it's not really a present interest for the beneficiaries. If you want the payments you make to the trust to qualify as a gift of presentinterest, a beneficiary must be given a Crummey power. The Crummey power gives the beneficiary the right to withdraw funds from the trust for a short period of time after each annual gift is made (typically 15 to 30 days). This limited right of withdrawal is enough to make your gift to the trust qualify as a present interest. Example(s): As part of her divorce agreement, Melissa creates an irrevocable trust that is to be funded by a life insurance policy on her life. She directs the trustee that upon her death, the insurance proceeds are to be paid to her former spouse, Mark, if he is alive and unmarried. If he is not, then the proceeds are to be paid to the Museum of Art. If she gives Mark a Crummey power, Melissa can use her annual gift tax exclusion to gift money for the policy premiums to the trust. Results: (1) Mark is protected in case of Melissa's untimely death, (2) Melissa can make the proceeds payable to Mark only if he has not remarried or died, and (3) the proceeds are not included in Melissa's taxable estate. Securities and Investment Advisory Services may be offered through NFP Advisor Services, LLC, (NFPAS), member FINRA/SIPC. NFPAS may or may not be affiliated with the firm branded on this material. Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2015