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Family

Life insurance as security for child, spousal support not without flaws

A recent Ontario Court of Appeal (OCA) ruling that allows a second wife and child to claim support from a deceased common-law husband’s life insurance policy raises some important questions and issues, says Ottawa family and estate lawyer Timothy N. Sullivan.

The ruling overturned a Divisional Court decision that found the second wife was not a "creditor" and therefore had no security interest in the policy.

Now the first wife and children, who were irrevocable beneficiaries, are still entitled to receive support from the $1-million policy, with the second wife receiving the remaining proceeds.

Sullivan, principal of SullivanLaw, says the issue has been in the spotlight because if a payor with a life insurance policy dies intestate, or revokes the beneficiary, the support recipients are out of luck since the insurance company isn’t a party to the separation agreement.

“If there’s no money available, then too bad, so sad,” Sullivan tells AdvocateDaily.com.

“It is a challenge for family lawyers to assure clients in the event somebody dies who is paying support doesn’t name you as an irrevocable beneficiary. So we provide things in the agreements such as requiring the payor to prove the recipient is a designated beneficiary, or if there’s a lapse in premiums, the recipient can pay those premiums and be reimbursed.”

Sullivan says he questions the result of the recent OCA case because it is not clear if they were common-law spouses by Ontario law. According to the decision, they were living in different countries and visited often. The woman became pregnant in the final months of the man’s life.

“Is she a dependent? It was a very short-term relationship,” Sullivan says. “I had a case where a couple had a child together but didn’t live together so there’s no spousal support entitlement. You have to cohabit.”

In effect, in this case, the OCA found a subsequent dependent spouse or children could claw back any excess over what is owed to the first family.

“By ‘clawing back’ into the deceased’s net estate only that portion of the proceeds of a life insurance policy in excess of the amount required to satisfy the deceased’s family law support obligations, funds may be made available to support his other dependents while, at the same time, discharging his existing family law obligations,” the decision says.

The decision means the ex-wife should have been characterized as a “creditor” of her former husband, and any remaining proceeds of the insurance policy to flow into the estate after the deceased's support obligations have been met.

Although the parties agreed to a settlement prior to the release of the OCA decision, the court agreed to hear arguments because of the broad implications in family and estates law.

Family lawyers looking to use insurance policies as security for child and spousal support in separation agreements should review this case carefully, Sullivan says.

“When drafting these support security provisions, they should perhaps be called a ‘pool of money’ rather than security for which arrears and ongoing obligations are to be paid in the event of the death of the payor,” he says, noting the court’s issue with the term “security.”

“The other thing lawyers may consider in drafting agreements is the recipient of support to be the owner of the policy,” he says.

In that situation, they would then be responsible for payments, and premiums are payable in the form of support, Sullivan says. “That can enforce the support obligation.”

Further issues could arise, however, if the payor does not qualify for life insurance because of health issues, he says.

“There’s a philosophy that the first family comes first,” Sullivan says. “That doesn’t change the reality of somebody going off and finding or creating a new family.

"I don’t think we should discourage people from getting into new relationships or taking on new responsibilities. But there is a prior, existing obligation and you really have to take care of that first.”

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