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Providing for children from a previous marriage

Options Considerations
Use life insurance

Your assets provide for your spouse while insurance proceeds give children an inheritance. Can be done by:

  • Making children beneficiaries of policies you own
  • Making money gifts to adult children to pay premiums on policies on your life purchased by your children
Use an irrevocable life insurance trust (ILIT)

Establish an irrevocable trust to buy life insurance for your children's benefit as an alternative to you or your children owning policies on your life.

This option is especially appropriate if the children are minors or estate taxes are a concern.

Name children as beneficiaries of your retirement plan

May need spouse's written consent to name anyone other than spouse as beneficiary of certain retirement plans.

Distribution rules for nonspousal beneficiaries are complicated, and tax consequences can be disadvantageous.

Make your children joint owners of your property

Gives children unlimited access to assets--they might have the right to sell assets and use the proceeds for their own benefit.

Assets become subject to claims of child's creditors if child runs into financial difficulty or gets a divorce.

The value of the property given to your children in a given year is subject to federal gift tax if the value per child exceeds the annual gift tax exclusion amount (currently $13,000).

Children will not receive a stepped-up basis for gifted property as they generally would for property you leave them at your death.

Leave your surviving spouse a lump sum

Leave your spouse a lump sum and give the remainder of assets to your children.

Alternatively, leave children a lump sum and give remainder to your spouse.

These methods may be suitable if you have a small estate and few assets.

Give your spouse the use of assets for life, with the remainder going to your children at your spouse's death

Can be accomplished through the use of a life estate and/or a qualified terminable interest property (QTIP) trust.

May promote conflict between surviving spouse and your children. Children's inheritance depends upon your spouse's spending and the way the assets are invested.