Haphazard Life Insurance Trusts Common in Divorce | How to do properly

After months of arguing, motions and tedious discovery in a RI divorce, someone remembers the life insurance policies at the last minute. Everyone is worn down and wants to get the ghastly divorce cause of action over, as soon as possible. Life insurance obligations for the benefit of the children or child are typically glossed over and often treated haphazardly.

People do not want to spend the time to properly consider each other’s mortality and make sure that everything is fair, orderly and equitable and the financial future of the children is accounted for, in the event of the untimely death of either of the parents.

Life insurance and divorce

Divorce in RI

Life insurance obligations should be a critical part of divorce settlement negotiation!

In the vast majority of cases someone suggest in settlement negotiations to the owner of the life insurance policy, ‘why don’t you just agree that if you pass away then your life insurance will be held in trust by the surviving spouse for the benefit of your children.’  Everyone agrees that this will be an irrevocable obligation.  Everyone including the Rhode Island divorce attorneys and the husband and wife agrees to this arrangement without much meaningful thought or reasoned discourse with a sense of relief that this divorce mess has concluded.

Slipshod divorce trust agreement

If this type of slipshod, careless language is set forth in the property settlement agreement or in the final judgment of divorce in Rhode Island, is this a real trust? It may be a trust but it may be a hit and miss proposition as far as the trust accomplishing what it was intended for.

I have raised objections to this type of disorganized trust language dozens of times in Providence Family Court Divorce causes of action, but nearly every time I am overruled by my client or someone who wants it all over with. They tell me to figuratively to ‘stand down’ and not create a REAL or ORGANIZED trust and get this over with.

Do not wait until the end of a divorce to consider life insurance

Perhaps the solution is that parties consider life insurance and its effect on the children’s future towards the beginning or middle of the divorce matrimonial case rather than a last minute throw-in.

Life Insurance and Divorce has become that ‘Just one More thing’ remembered at the end rather than an important part of the settlement negotiations. Husband and Wife litigants may spend hours fighting over the Couch, flat screen and dining room table but life insurance is agreed to in a few minutes in a last minute exchange between the parties or their RI Family Court Lawyers.  Makes no sense does it?

Here are 7 potential issues that could arise by such a haphazard life insurance trust:

1.) The purported trust does not set forth when if ever the children are entitled to the remaining trust money. Is the mother obligated to give any remaining money over to the children upon a child’s 18th birthday? The 23rd birthday??  or never?

2.) What if the owner of the life Insurance has another child and does not for whatever reason obtain life insurance for that child? Isn’t that child also entitled to be supported after the untimely death of their parent?

3.) What can the Trustee (mother or father), use the funds for? Is it for the child’s college education? Is it to replace child support the deceased parent would have paid if he or she lived? If it is to replace child support can it be used to pay for rent, mortgage payments for the former marital domicile? How about a new house partially owned by the spouse’s paramour or new husband?  How about vacations with the child?  Can the trustee use the funds for things that benefit the trustee parent but only tangentially benefit the minor child or children? For example the trustee uses the funds as a down payment on a new house or pool that the child will be using and enjoying?

4.) When does the obligation to name the trustee end when the children are 18? 21? 23? or 25?

5.) What happens if the owner and trustee parent die together or in a short succession who is the secondary  backup trustee?

6.) If there is more than 1 child, is 1/2 of the trust funds for 1 child and the other  half for the other child or does the trustee mother have the right to make the decision on how the funds are delegated. What happens when a child is an adult and wants his share of the money and the other child is a minor with important needs such as critical medical expenses.

7.) Is the trust money going to be set in a separate account with the trustee in a fiduciary capacity? Or are the funds to be mixed into the checking account of the trustee?

8.) Should the trustee be a different person than the parent with physical custody of the child after the death of the owner of the life insurance policy. A neutral person can insure that the trust objectives are satisfied for the best interest of the trust beneficiaries.

What is the Solution?

The proper way to do a trust in a divorce is to ACTUALLY write up a trust and have the person who owns the life insurance policy to name the trust as beneficiary of their life insurance.  The trust will spell out the obligations of the trustee and when the trust beneficiaries will obtain the trust corpus and will deal with all of the issues set forth above in a meaningful and clear manner.

Another solution is that the person drafts a will and in the will has a trust setting forth the agreement the parties reached in divorce Court naming the children as beneficiary, The owner of the life insurance policy and insured person would then name their estate as beneficiary of the life insurance. This raises all types of issues because what happens if the person changes their will later or has another child? This is not the best solution to the problem in the context of a divorce.

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