The recent unpublished opinion of the Minnesota Court of Appeals in Hall v. Reynolds, No. A17-1095, 2018 WL 700191 (Minn. App. Feb. 5, 2018) provides a lesson in how life insurance provisions in divorce decrees are enforced by district courts. In Hall, the decedent was ordered in his divorce decree to name his ex-wife as sole beneficiary of a $100,000 life insurance policy. However, he named his mother, and later his fiancée as primary beneficiary of both of his life insurance policies in violation of the decree. After he passed away, his fiancée received proceeds from the policies totaling $530,412.22 and his ex-wife brought an action for a constructive trust claiming unjust enrichment. After the district court granted summary judgment in favor of the fiancée, the ex-wife appealed to the court of appeals, which reversed the district court. The court of appeals held that an obligor's violation of a court-ordered obligation to maintain life insurance in a specific amount is enough to impose a constructive trust or to claw back insurance proceeds when a court-ordered beneficiary does not receive the amount or policy to which they are entitled. In addition, the court of appeals, citing Head v. Metropolitan Life Ins. Co. 449 N.W. 2d 449 (Minn. App. 1989) and Thiebault v. Thiebault, 421 N.W. 2d 747 (Minn. App. 1988), held that the ex-wife could claim an amount in excess of the child support remaining to be paid because the decree's requirement of a $100,000 policy controlled how much was due.
While reviewing this decision, I read up on other decisions relating to the issue of life insurance and marital dissolution proceedings, and what follow are some useful practice tips and questions based on Hall v. Reynolds and these other decisions
- In an unpublished, non-precedential opinion, the Minnesota Court of Appeals held that district court is not required to make a dollar-for-dollar match between the amount the amount of the expected future obligation and the face amount of the life insurance policy. See Gardner v. Gardner, No. A16-0102, 2016 WL 7188697 (Minn. App. Dec. 12, 2016).
- Parties need to decide whether they want a specific amount of support and/or maintenance to be secured with life insurance or a non-specific amount (e.g, the amount of the expected future obligation reduced to present value). This is easier said than done. If a specific amount is to be utilized, obligors will be apt to want an amount lower than the expected future obligation and obligees will want to have an amount that's higher than the expected future obligation. This may be easier to calculate in the case of child support or a maintenance award of fixed duration, but more difficult in the case of permanent or indefinite maintenance (is it the amount of maintenance to be secured premised on an expectation that maintenance would be paid until social security retirement age or the obligor's life expectancy?). A less specific characterization of the amount will raise even more questions as to the amount to be secured in the case of permanent or indefinite maintenance.
- Will the obligor be given the ability to reduce the face amount of the life insurance as the amount of the principal amount of the expected future obligation reduces with the passage of time? In the case of child support, who will be the insured – the children (or a trust established for the benefit of the children) or the obligee? Also, should the children's entitlement to social security survivor's benefits in the impact of the obligor's death impact on the amount of life insurance to be used as security?
- A party can replace their spouse as beneficiary of a life insurance policy prior to the commencement of a divorce proceeding without running afoul of section 518.58 subdivision 1a's prohibition against the dissipation or transfer of an asset in contemplation of a divorce. See Nelson v. Nelson, 866 N.W. 901 (Minn. 2015). What matters are restraints against changes in beneficiaries or court orders (temporary or otherwise) issued during the pendency of the divorce proceeding.
- Old caselaw limiting the use of life insurance as security for a spousal maintenance award to the “exceptional case” has been overruled. Kampf v. Kampf, 732 N.W. 2d 630, 635 (Minn. App. 2007).
- The possible requirement to secure child support with life insurance is not limited to obligors. A district court has the discretion to order even a custodial parent/obligee to provide security in the form of a life insurance policy. See Hunley v. Hunley, 757 N.W. 2d 898, 900-01 (Minn. App. 2008).
- To the extent that an obligor does not have an existing insurance policy sufficient to meet the amount of security requested, the district court must make findings of fact regarding the obligor's insurability and the cost of insurance. Lee v. Lee, 775 N.W. 2d 631, 642-43 (Minn. App. 2009). An existing term life policy through an obligor's employment may often suffice. The problem is when the obligor lacks an existing policy or loses employment through which they once had a policy. Does the life insurance provision in the divorce decree anticipate potential changes in employment or is it a fixed obligation that continues regardless of the obligor's access to insurance? What happens when the obligor can no longer pay the premiums, especially on a whole life insurance policy?