Whose life insurance is it anyway?

Sometimes a couple separates and one spouse must pay child support to the other. They usually put the arrangement into a Separation Agreement so that the terms are clear. On occasion, the spouse who is paying the support agrees (or is required by the court) to buy a life insurance policy, the intent of which is to ensure that if the paying spouse dies, there is enough money to pay out the remainder of the child support.

This arrangement isn't as common as it once was, but it's definitely still out there. A policy like that usually names the ex-spouse, the one receiving the payments, as the beneficiary of the policy.

Recently I read an article posted on Estates and Elder Law in Canada, a blog written by lawyer Chris Staples, that addresses an arrangement like this. The article was about the recent BC case of Milne Estate v. Milne. In that case, a man had a separation agreement just like the one I described above. However, he changed the beneficiary of the policy to name his new common law wife. When he died, he still owed child support.

The question that the court had to decide was who should receive the life insurance money. Should it be the common  law wife, who was named on the policy? Should it be the ex-wife, according to the separation agreement? Life insurance policies are normally outside of an estate, so should it affect the policy if his estate owed child support?

The court examined two basic concepts. One was constructive trust, a "fairness" rule under which the courts can order changes where there has been fraud, unjust enrichment, or a breach of the duty of loyalty. The court said that in this case, constructive trust did not apply because once the requirement to hold the life insurance policy is put in a written agreement, it's no longer about fairness, but about contracts. That would mean the common law wife could keep the insurance proceeds.

The court went on to look at the case through the second basic concept, contract law. This applied because the separation agreement is a contract. The court said that the estate had to honour the contract signed by the deceased. This raised a new question - did the estate have to pay the whole insurance policy to the ex-wife, or just the amount of unpaid child support?

The court determined that to answer the last question, it had to look at the specific wording of the separation agreement (meaning that different wording used in a different agreement could have led to a different result). If the separation agreement had specifically said that the policy was only in place to provide security for the child support obligation, the ex-wife should only receive the amount of unpaid support. However, the agreement did not clearly say that; it only said that the husband was to maintain the policy. That meant that the ex-wife was to receive all of the policy proceeds.

 Click here to read Mr. Staples' article, which contains more detail than I have included in this summary.

This was an interesting result, since the court seems to be saying that two different beneficiaries should receive the proceeds of the policy. Possibly there will be more court proceedings to straighten out who is to get what.

This case illustrates one extremely important point: make sure every element of your estate works together. This means your will, powers of attorney, life insurance, beneficiary designations, joint property, and divorce/separation paperwork. Each item might be just fine standing alone, but if they don't work with each other, your estate will be spent on lawsuits to figure out the things  you should have figured out while you had the chance.