As the beneficiary of life insurance do I have to spend the money a certain way?
I was the beneficiary of my ex-husband’s life insurance. I gave some of the money to his children and some of it I have kept back for other children. The children who still have money under my control are complaining about the fact that I won’t just give it to them and try to “guilt” me into just handing them the money. I am trying to do what I think their father would do if he were alive and had the money. Since I was the beneficiary do I have to give them anything at all? They seem to think because he was their father and we were divorced that I do not have the right to say what happens to the money and since I have set it aside as theirs they can just do with it when they want and as they want. I just don’t want the money to be spent frivolously and then when they need it there will be none there.
Assuming that you were the sole beneficiary of the policy, you can do anything with the funds that you choose to do. You are under absolutely NO legal obligation to give any of it to anyone. Had he intended for them to receive anything directly, he wither would have named them as beneficiaries or set up a trust to provide for them.
If you choose to give some of the money to his children, bear in mind that since they were not beneficiaries and have no legal claim to the funds there may be Gift Tax consequences in giving any of the proceeds to them. You are allowed to gift up to $13,000 per year per recipient to an unlimited number of recipients without incurring any potential Gift Tax liability. The annual exclusion may vary from year to year and may increase in future years.
After that you must file a Gift Tax return and any excess gifts in any one calendar year are applied first to the $5 million unified exclusion before any tax is actually due. The Gift Tax is linked to the Estate Tax via the unified exclusion so it reduces your estate’s exclusion when you pass and may trigger or increase any Estate Tax when you pass. Bear in mind that the Gift Tax is paid by the donor, not the recipient, so if you give an excess amount you may eventually have to pay the Gift Tax.
If you want to provide something for his children, say to cover cost of a college education, there are exceptions to the Gift Tax rules that will avoid any Gift Tax implications. Gifts of education or health care are exempt from the Gift Tax as long as you make the payments directly to the school or healthcare provider yourself.
In any other cases, you should consult with a a professional fee-based estate planner to minimize any tax liabilities all around before making any committments.
Life insurance is paid to the beneficiary to do with as they wish. You are absolutely not obligated to pay anything to anyone. An estate is a different story, but life insurance is independent of the estate (sometimes used to state planning though).
Here is what I would say; If he wanted them to have money immediately, he would have made them the beneficiary on a policy. Since he did not, they will get it when you decide to give it to them.
They cannot sue you; a lawyer wouldn’t take the case because they wouldn’t win.
Unless the beneficiary was set up as a trust with specific distribution instructions and you are the beneficiary, then the money is yours and what you do with it is up to you. If you decide to give it to children, that is your prerogative, but you may want to check with a tax professional on the tax implications of gifting large sums of money.
The reverse is also true. If you choose not to give the money to children, then again, that is your choice. Had their father wanted the money given out in a certain manner, then he should have given specific instructions before his demise.