Recent Tax and Estate Planning Developments

Insurable Interest Post-Divorce

Les Williams (“Husband”) divorced Mary McCall (“Wife”) after 25 years of marriage. The divorce agreement mandated that Husband pay Wife alimony until March 2001, and maintain a life insurance policy on his life sufficient to fund any alimony not paid at Husband's death. Four years after the divorce, Husband finally purchased a $250,000 life insurance policy. Husband finished up his second divorce in 2001, then died in June 2002. Since Husband's date of death was after the date the alimony requirement to Wife ended, there was no obligation for Husband to maintain insurance for Wife. The parties in this case, and their counsel, seemed to forget about the concept of follow-through. While each of the points below will be received by practitioners with a yawn as obvious and simple, the reality seems to be that these errors in the McCall v. Smith case are common:

• Where was the follow-through by Wife and her counsel? Husband waited four years after the divorce to fulfill his insurance obligation. Wife's counsel seems never to have specified the type of insurance or reporting requirements in the agreement. Neither Wife nor her counsel seemed to have followed up.
• When Husband filled out the beneficiary designation, he should have restricted the payments to Wife to the amount required under the agreement, or used a trust to hold it so that a trustee could make the minimum payment required to Wife, and the balance could be distributed however he chose.
• When Husband's obligations to provide insurance for Wife ended in March 2001, he should have met with his estate or financial planner and revised the beneficiary designation. Even if the designation had been written correctly, a revision was required to remove the Wife entirely and avoid any ambiguity of her interests.

Naturally, the children sued, claiming that Wife had no insurable interest in Husband's life, so that the proceeds should be paid to them. State law permitted anyone to purchase insurance on themselves, naming another as beneficiary and that named beneficiary would have an insurable interest. Because Husband named Wife as beneficiary, without limiting her rights to the claims under the divorce agreement, alimony due, or the date at which that interest should have ended, Wife's insurance interest was not cut off. Had Wife's interest been denominated as that of a creditor, the termination of the alimony obligation would have cut her rights off, so that avenue of foreclosing her interests was also not available.