Insurance proceeds exposed under a deceased’s support obligations

By Doug Carroll | February 24 2015 09:00AM
At issue

To some lawyers who have practiced in the area of family law, that term may seem a bit of a misnomer. In my case, it was the first 2-3 years of my legal career, and based on that relatively brief experience, I would suggest that a more apt title might be ‘breakdown-of-family’ law.Indeed, it was the stress of being regularly immersed in bitter disputes that motivated me toward the more positive atmosphere I found in estate planning practice.

Still, an effective family lawyer can offer much needed stability in the wind-down of a relationship. And of course where children are involved, there will be a continuing connection that has to be managed.

Insurance supporting support obligations

Apart from division of assets (and leaving aside emotional healing), the focus of the separation agreement is generally on child and spousal support. And for the party on the receiving end, surety of payment is a paramount priority.

Even for parties who come to resolution on these issues amicably, external developments can nonetheless upset the apple cart. If a payor spouse/parent becomes incapacitated or dies, a contractual commitment in the separation agreement may not be worth the paper that it is written on.

Thus, life insurance is frequently used (and to a lesser extent disability insurance, though arguably of no lesser need) to reinforce the support obligations. Commonly, the payor is required to maintain the payee as beneficiary for so long as the support requirement persists.

Milne Estate v. Milne, 2014 BCSC 2112

The Milnes’ relationship lasted for 20 years until their separation in 2011. At that time, their only son was 17.

On consent of the parties, a court order was issued in 2012 requiring Mr. Milne to pay $1,380 in monthly child support, with equal sharing of costs for the son’s enrolment in a photography program at a local university. Mr. Milne was required to maintain Mrs. Milne as the beneficiary of an existing $500,000 life insurance policy for so long as he was obligated to pay child support.

In breach of the court order, in early 2013 Mr. Milne changed the beneficiary designation in favour of his new partner. Mr. Milne died in the summer of 2013.

The executor of Mr. Milne’s estate acknowledged that the change of beneficiary designation was a breach of the order. However, it was argued that as the insurance was essentially security for child support, any claim should be limited to the value of the remaining support payments.

On reviewing the terms of the order, the judge found that there was “an express temporal link between Mr. Milne’s life insurance obligation and his support obligations.” As to the quantum connection to support asserted by the executor however, the judge held that the parties “clearly intended Mr. Milne’s insurance obligation to be independent and not stand only as security for his outstanding support obligation.”

The executor urged the judge to consider surrounding circumstances in interpreting the terms of the order. Among the issues, the judge noted that potentially significant spousal support for Mrs. Milne was yet to be determined, which worked against the executor’s position.

The full $500,000 face value of the policy was awarded to Mrs. Milne.

Practice points
  1. Insurance can support continuity of child and spousal support. To compel the payor not to divert its intended use, the specific policy and its management should be outlined in the separation agreement.
  2. In Milne, the amount of the insurance was considered independent of the child support, but the terms of a given agreement could prescribe limits. By similar token, in a case where child support obligations may be larger (and projecting further in time), it is likely that the estate will have an ongoing obligation to those children as dependants even if the policy proceeds are insufficient to fund that need.
  3. Even with explicit terms, parties should discuss with their respective lawyers whether surrounding circumstances may be taken into consideration if the matter ends up before a court.