A common security mechanism for the payment of child support or alimony is through a life insurance policy. If all of the existing life insurance is to remain in place as security there is nothing else to do. But what happens when one of the parties has the right to create a life insurance trust for the benefit of the minor children as agreed upon in the separation agreement and fails to do so.
Presumably, if the right to form such a trust is in the agreement, it is because one of the parties had concerns that if the former spouse received the life insurance proceeds upon their death, the monies would not be used to benefit the children. Surprisingly many clients do not follow up and just leave the beneficiary designation in the name of the former spouse. Who gets the money in the event of an untimely death – the former spouse or the children?
In the 1986 case, Stiles v. Stiles, the court held that a divorce does not revoke a designation of beneficiary unless the divorce proceedings or insurance contract so provides. Typically, the spouse who pays child support is required to maintain a then existing life insurance policy for the benefit of the children until emancipation. When the payor spouse requests for the right to create an insurance trust to hold the proceeds of such policy for the benefit of the children, by agreeing to the formation of such a trust, it is highly likely that the former spouse has waived his/her right to any of the proceeds.
The Uniform Probate Code “represents a legislative determination that the failure of an insured to revoke the designation of a spouse as beneficiary after dissolution of the marriage more likely than not represents inattention.”
Many cases suggest that a payor’s failure to change the beneficiary designation constitutes a wrongful act. In the case, Green v. Green, the children were successful in their suit against their father’s second wife because he changed the beneficiary designation on his insurance policy naming the second wife in violation of the terms of the separation agreement. Here, the second wife was ordered to pay the children the proceeds of the policy she had received.
We help clients understand both the immediate impact and the long term repercussions of their choices, allowing them to make the best decisions possible.