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My domestic partner and I have a young child (3-5 years old). We are both the legal parents. My domestic partner also has quite a bit of student loan debt (80K+) that is managed on a 20 year income based repayment plan.

Now, I am in the process of naming beneficiaries for my life insurance payout (250K) and other medically related payouts.

The result is I would like my domestic partner to have access to to all of the money for living essentials (mortgage, utilities, food, education for our child) without any of it being considered income on their AGI. This is because the income based repayment is based on the AGI.

Is leaving the insurance money directly to my child a viable option? If I die, will my partner have access to those funds if I simply name my child as the beneficiary?

I understand that the perfect solution to this problem is a trust, but I am not sure I am at the point in my life where I can set one up.

TsSkTo
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Any money you bequeath to your child becomes your child's money. It would not belong to your partner. This is true whether it is an insurance payout or not.

Since your child would be a minor, someone would be appointed to manage that money on their behalf. Normally that would be your partner. However your partner would be unable to use it for their own benefit. Doing so would be theft, and might bring criminal prosecution. Using the money for the child's benefit, such as their education, is not a problem. Appointing a different person to manage the money would not help - they would be obliged to manage it solely in the interests of the child, not your partner.

If the child were an adult it would be entirely up to them whether they supported your partner or not.

DJClayworth
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If you are in the US, life insurance payments are not considered income. I assume this since you are using the term "AGI".

Now the income one earns from life insurance, if invested, will change one's AGI.

How old are you? What are you paying per thousand for the life insurance? Hopefully you are doing level term insurance and can add an extra 100K for very minimal costs. This way your partner can pay off the loans, grieve the loss of you, and not have to worry about gaming the AGI.

You are being kind in your planning, but one thing you are not taking into account is the loss felt by your family.

If you have been sold on a Whole or Universal life policy, the best bet is to cancel that now. They suck and you can search this site and many others on why they suck so bad. Yes you will lose money on it because of the 15 year surrender values, but bad decisions are best ended soon.

Having a bit too much insurance will have minimal cost if your purchase a level term policy, and show love and kindness to your family.

Most people, cannot afford to purchase enough insurance with a type of whole life (and yes universal life is a type of whole life). Doing that only shows kindness to your sales agent. Your family will be left to make very tough financial decisions after you are deceased.

Buying Level term and investing in the stock market will provide for your family if you die early, and will remove the need for life insurance if you live past your 50s.

Pete B.
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I understand that the perfect solution to this problem is a trust, but I am not sure I am at the point in my life where I can set one up.

Setting up a trust would probably cost on the order of $1,500-$2,500. As you acknowledge, a trust is probably the best solution to your problem.

I'd also recommend thinking a bit more about the big picture.

Ultimately, if you are first to die, your partner if going to have to meet all of the household expenses, meet all of the needs of your child, and pay off all of the student loans that income based repayment does not forgive in 20 years. And, without you to contribute to the household's finances, your partner is probably going to have to make choices that will increase your partner's income and as a result increase the amount of the income based repayment of the loan which will reduce the benefit provided by that option.

Making your plan more complicated may save your partner $10,000-$30,000 of principal payments over twenty years in a best case scenario, but possibly much less, but at the cost of making it very complicated to deal with.

It may be more straightforward to simply leave all of the life insurance to your partner, eliminating the need for trusts or distinctions between your child's needs and your partner's needs that could give rise to legal liability, and eliminating the stresses involved with paying student loans and being a single parent at the same time.

You may also want to think about getting additional life insurance beyond $250,000, as that seems pretty meager to cushion your partner from the burden of having to raise your shared child alone for 14 years and beyond into higher education, without your financial support. Paying $100 a year in more premiums would allow for a bigger death benefit that would solve the problem you are trying to address in a beneficiary designation by fully paying off your partner's student loans, for less the cost as a trust, with money left over.

ohwilleke
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