When a Support Payor Dies – How Courts Resolve Disputes Over Life Insurance Policy Proceeds
This week’s Blog deals with a narrow, but interesting legal issue about the interplay between life insurance proceeds, spousal support payments, and dependents’ rights under the Succession Law Reform Act.
By way of background: It is common knowledge that as part of a court’s resolution of the marital dispute between a former couple, it may order one spouse to pay support to another.
What may be less well-known, is that under both the provincial Family Law Act and the federal Divorce Act the court is entitled to secure the payment of these support obligations, by ordering that the support-paying spouse must designate the child support or spousal support recipient as the irrevocable beneficiary under a life insurance policy. It is a straightforward mechanism by which the court essentially makes a pool of money – in the form of the proceeds of a life insurance policy – available to satisfy the support payor’s obligations that are in place at the time of his or her death.
However, the efficacy of that mechanism can get muddied if at the time of the support payor’s death there are also competing claims against his or her Estate by other dependents, arising under the Succession Law Reform Act (the SLRA).
In these cases the question arises: Who gets the benefit of the life insurance policy proceeds? Is it the irrevocably-designated beneficiaries, who were mandated as such by court order? Or is it the SLRA dependants?
This was the fact scenario and legal issue considered by the Ontario Court of Appeal in a case called Dagg v. Cameron Estate. To reach a resolution, the court looked at the provisions of the SLRA (specifically section 72) which sets up a “clawback” mechanism. The provision essentially states that the capital value of certain kinds pre-death gifts, asset transfers, and money deposits by the deceased person are nonetheless:
- included as testamentary dispositions at the date of his or her death; and
- deemed to be part of his or her net Estate for the purposes of ascertaining the Estate value.
Included in this category are certain items relating to life insurance, and specifically includes any amount payable under a designation of a beneficiary.
Looking at that provision and others in the SLRA, the court in Dagg concluded that the clawback does not apply to that portion of the insurance proceeds that are needed to satisfy the support payments. Instead, the required portion of the proceeds goes straight to those support recipients who have been designated as irrevocable beneficiaries pursuant to a court order, since such recipients are effectively considered “creditors” of the Estate in law. (The Appeal Court did clarify, however, that it was not the full proceeds of the policy that were excluded, but rather only that amount that was needed to satisfy the deceased’s support obligations).
For the full text of the decision, see:
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