Make Sure That Beneficiary Designation is Iron-Clad!
When separated spouses are able to settle (rather than litigate) their support claims against each other, they will negotiate what are known as Minutes of Settlement, ideally with the help of their respective lawyers. This document solidifies and reduces to writing the specific terms of the agreement they have reached.
In well-drafted Minutes, it is not uncommon to see a clause that operates to “secure” or reinforce the payment of spousal support from one spouse to the other. The clause will require the support-paying spouse to take out a certain amount of life insurance, and designate the other spouse as the beneficiary of the policy. That way, if the life-insured spouse passes away, the recipient spouse – in the role of named beneficiary – is automatically entitled to insurance proceeds, which are calculated to cover the amount of support that he or she would have received if the spouse were still living. (And with the appropriate adjustments, the same approach can be taken to securing child support, with the children being designated as the policy beneficiaries.)
When negotiating Minutes of Settlement that include this type of clause, it is important to make sure that the language is clear. The clause should stipulate either that: 1) the beneficiary is to designated irrevocably under the policy, or 2) that the support payor/insured cannot change the beneficiary designation without the spouse’s or other beneficiary’s consent. It should also ideally also stipulate exactly how much life insurance must be maintained by the insured spouse.
A recent case illustrates what can go wrong, when these steps are not followed.
In LaMorre v. Kershaw, the separated husband and wife struck an agreement that the child support owed by the husband would be secured by him: 1) designating their two children as beneficiaries of his life insurance policy; and 2) naming the wife as trustee of the insurance proceeds in the event he died before the kids reached the age of majority. This agreement – which importantly did not specify that the beneficiary designation was to be irrevocable – was duly incorporated into a court order.
However, when the husband started a relationship with a new girlfriend, he secretly changed the beneficiary designation: He added her as a 50 percent beneficiary, and made her the new trustee of the remaining 50 percent that the two children would now have to split.
The wife and children found out only after the husband died in an accident, when the girlfriend received $189,000 in proceeds, plus another $189,000 as trustee for the children (which she eventually did pay out to the children when they reached the age of majority). They sued the girlfriend for the other $189,000 that she had received personally, arguing that the money should have been used for the support and maintenance of the children. They claimed that, in law, she had been “unjustly enriched” at their expense, and that the original contract between the husband and the wife should prevail instead.
The court agreed. Although the case had some unique factual elements and some murky contractual wording, in the end the court concluded that the original agreement between the husband and wife contractually required him to maintain the children as sole beneficiaries of the life insurance policy, which he had failed to do. If only on the basis of public policy, it was important to uphold the now-deceased husband’s original bargain to use his life insurance proceeds to secure the child support he owed his children. As the court explained:
In addition, in my view, public policy dictates that [the new girlfriend] not be permitted to keep the funds. Spouses who enter into contractual arrangements to secure the payment of child support should be held to those bargains. It would be improper to allow [the husband’s] designation of [the new girlfriend] as a 50% beneficiary to stand, in the face of his previous agreement to name [the wife] trustee of these funds for the benefit of the boys.
The court acknowledged that from the new girlfriend’s standpoint, she might have had a reasonable expectation of receiving part of the funds from the husband’s life insurance policy; however, it could not take priority over the expectations of the wife and children that the husband would comply with his contractual and court-ordered obligations. Viewed another way: the girlfriend had been purportedly swapped in as beneficiary only after the husband and wife had already made their original agreement stipulating something different – at a time when the husband was contractually not at liberty to make that change.
The court ordered that the girlfriend must return the money with interest, and that it should be redistributed according to the husband and wife’s initial agreement.
For the full text of the decisions, see:
LaMorre v. Kershaw, 2020 NSSC 108