Estates & Wills & Trusts

Insurance trusts effective way to avoid beneficiary disputes

By AdvocateDaily.com Staff

Family law counsel should consider a transfer of insurance ownership or an insurance trust when securing future support payments after a series of controversial decisions involving the proceeds from life insurance policies, Toronto wills and estates lawyer Mary Wahbi tells AdvocateDaily.com.

A 7-2 majority of the Supreme Court recently ruled that the common-law partner of a deceased insurance policyholder was unjustly enriched when she was named the irrevocable beneficiary, even though the dead man’s ex-wife had been paying the premiums for more than a decade.

The ruling overturned a majority decision by Ontario Court of Appeal, which found that the deceased provided a “valid juristic reason” for his common-law wife to receive the $250,000 payout by designating her the irrevocable beneficiary under the policy while refunding to the spouse the $7,000 premiums paid by her.

That followed a separate decision by the appeal court limiting when life insurance proceeds can be counted towards the value of an estate. That case involved a court-ordered $1-million policy taken out by the deceased to secure child and spousal support payments to his ex-wife.

A Divisional Court panel initially backed a Superior Court judge’s decision to allow the insurance proceeds to be “clawed back” into the man’s estate for the benefit of his new partner and their young child before the appeal court stepped in and reversed the decision.

Wahbi, partner with Fogler Rubinoff LLP, says life insurance policies are routinely used by family lawyers as a mechanism to protect their clients in case support payors should die before their obligations are met. However, she says many of the problems associated with the arrangement, along with the potentially crippling costs of litigation, could be avoided by either transferring the ownership of the policy or setting up an insurance trust to receive the proceeds from any policy.

“An agreement to name the support recipient as the beneficiary isn’t enough because the policy owner controls the policy. The owner can change the beneficiary any time or stop paying the premiums and let the insurance lapse," she says. "If ownership is transferred, even to joint ownership, the support recipient can have control or joint control over who is named as beneficiary, and the proceeds will not be subject to claw back for dependant’s relief claims.

"Since support may be for a limited time the policy may have significant value, and there may be tax repercussions to transferring ownership, a payor spouse could resist the transfer of ownership. In that case, having an insurance trust may be a good compromise. That way, security for support can be provided without it becoming a windfall, by setting out in the terms of the trust what should happen to any remaining balance after the support obligation has been met,” Wahbi says.

The Supreme Court case dates back to the end of the 20-year marriage between the successful appellant and the deceased in 1999. As part of an oral agreement made after their separation, the woman agreed to continue paying the premiums on his life insurance policy, with the understanding that she would receive the proceeds when he died.

However, according to the decision, the deceased reneged on the agreement just nine months later, when he changed the beneficiary designation on the policy in favour of his common-law spouse, who was still living with him at the time of his death.

At the trial level, a Superior Court judge ruled in favour of the ex-wife, but a 2-1 majority of the province’s appeal court overturned that decision, finding that the irrevocable designation made under the Insurance Act, provided a “juristic reason” for the common-law spouse’s windfall, defeating the unjust enrichment claim.

But at the Supreme Court, the majority sided with the ex-wife, concluding that the earlier agreement meant that the irrevocable designation was no longer the deceased’s to make.

Writing for the majority, Justice Suzanne Côté, found that the oral agreement was binding, and could not be automatically overridden by an irrevocable designation under the Insurance Act.

As a result, she concluded that all three elements of the test for unjust enrichment, which require the defendant to be enriched, the plaintiff to suffer a corresponding deprivation, and the absence of a juristic reason for the enrichment, were met.

“Because each of [the ex-wife’s] payments kept the policy alive, and given that [the common-law spouse’s] right as designated beneficiary necessarily deprived [the ex-wife] of her contractual entitlement to receive the entirety of the insurance proceeds, I would impose a constructive trust to the full extent of those proceeds in [the ex-wife’s] favour,” Côté added.

The dissenting judges said in their reasons that they would have disallowed the unjust enrichment claim on the basis that the deprivation and enrichment, in this case, did not correspond well enough to one another. They would instead have considered the ex-wife a creditor of the deceased’s estate with no claim on the policy proceeds.

“There’s no doubt this was an important issue to clarify, and they went all the Supreme Court to do it,” Wahbi says.

“But at the end of the day, the result isn’t great from a planning perspective,” she adds, noting that the Supreme Court’s unjust enrichment analysis injects a fresh dose of uncertainty by suggesting that equitable claims can no longer be ousted by a legislatively backed designation.

“The irrevocable designation used to be the end of the story, and you could rely on it,” even if it could lead to some apparently unfair outcomes, Wahbi explains.

She says family lawyers representing support recipients should negotiate to have their clients named as the owners of the policies to ensure they receive beneficiary entitlements.

“If the recipient owns it and pays the premiums, nobody else can change the beneficiary designations,” Wahbi says. “It’s certainly doable, although it may also have some tax repercussions.”

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