Divorce and Life Insurance

by Richard F. O’Boyle, Jr., LUTCF, MBA

Divorce is never easy. It is an emotionally taxing experience, but may be an opportunity for a new beginning. There are so many minor details that need to be ironed out between the two parties that some are bound to get overlooked. Life insurance is an important aspect that many people might not think about until it’s too late.

Divorce Decree

When you purchase life insurance, the goal is to make sure your family is provided for in the event of your death. It’s important that the life insurance is addressed in the divorce decree and the proper language associated with it.

You and your soon to be ex-spouse need to come to an agreement on what you plan to do and what your options are. The odds are your spouse is the beneficiary of the money. While you most certainly make changes to your will after a divorce, remember that beneficiaries on a life insurance policy can only be changed by filing a new beneficiary with the insurance company.


In many cases, the divorce decree will spell out one partner’s financial obligations to the couple’s children. These may include a requirement to provide financial child support, health insurance coverage, college funding or assistance of other sorts until the children reach a certain age. Just as with a married couple, life insurance would provide a ready financial asset in the event that the individual dies prematurely. Some planners would calculate the value of these obligations and obtain a term life insurance plan (or repurpose an existing plan) that would cover this amount.


As married couple accumulate assets over time, at the time of divorce those assets are usually split up. The cash values in a permanent life insurance contract are assets just as a house, retirement plan or ownership in a business. Keep in mind that permanent life insurance has very specific tax rules associated with it – which can be a curse and a blessing.

Transfer of Value and Taxation


When you transfer the value of your life insurance to another party, the government says that the death benefit is now taxable. This is called the “transfer for value” rule. Life insurance death benefits are generally federally tax free, but people were taking advantage of this by continuously transferring the policy and reaping the benefits.


The rule has been adjusted so that divorcing parties are not subject to the transfer for value rule: The recipient spouse will have a cost basis in the policy equal to the net premiums paid by the transferor spouse. So while the death benefit might not be fully tax free, it will depend on how much in premiums were spent over the previous years. It’s wise to speak with your attorney about the specifics of your case and relevant state laws (which may vary considerably).


If the divorcing partners have significant assets, including the value of life insurance death benefits, they may be subject to federal and state estate taxes. This can be extraordinarily complicated and is not the subject of this article.


It’s a good idea to keep a policy in force until all of the details have been worked out: don’t jump the gun and cancel a policy to buy a new one. You may not be getting the best rate and in some cases may even be uninsurable. For this reason, make sure that you have a good grip on exactly what coverage you have, and what coverage you will need.


Designating Beneficiaries


If children are involved, you should carefully consider whom to name as the new beneficiary. Minor children who receive life insurance proceeds may wind up with the ex-spouse as their guardian – and controller of the inheritance. This may not be in synch with your wishes.


It’s not uncommon to place a life insurance policy into an irrevocable life insurance trust so that you can spell out how the death benefit will be paid out after you die. A trust is an entity that is managed by a person or group of people to manage the trust’s assets according to the guidelines spelled out in the trust’s founding documents. For example, if your children are very young and can’t handle suddenly having several hundred thousand dollars, you can make the trust the beneficiary. The trustees would ensure that the children get enough money for college, health or even vacations. The children or your ex-spouse can’t touch the money without the trustees’ approval.


You should also address the possibility of a future spouse and their claim to the insurance. If children are not involved, you can negotiate taking your current spouse off and either canceling the policy or changing to a different beneficiary. Your spouse may want to fight you on this, especially if they stand to get a significant amount of money, but it should be hammered out in the divorce decree.


Divorce can be a messy business and hardly anyone leaves it with exactly what they want, but the key is compromise. This goes for life insurance claims as well. You and your ex-partner need to agree on what to do and have it written into the decree. You may not get what you want and your partner may not get what they want, but the decisions need to be made.


If you have no children, you may want to consider simply canceling the policy and getting another one for yourself when the time is right. The goal of life insurance is to provide financial stability in the event of your death. Since your spouse will no longer be your spouse, you may be under no legal or moral obligation to provide for them after your death.

Year End Retirement Tips 2013

by Richard F. O’Boyle, Jr., LUTCF, MBA

As another year winds down – and another begins – it behooves us to take a look at our current retirement plans and make necessary adjustments.

Retirement Plan Contributions for 2013

You may have limited time to maximize your retirement plan contributions for the tax year 2013. Most people can stash money into traditional IRAs and Roth IRAs as late as April 15, 2014 (for tax year 2013), but some plans have to be filled before December 31, 2013.

The annual limit for traditional IRAs and Roth IRAs is $5,500 for 2013 ($6,500 if you are over age 50) – and must be deposited by April 15, 2014. Company-sponsored and Union/Non-Profit plans such as 401(k), 403(b) and 457 plans allow 2013 contributions up to $17,500 or $23,000 (age 50+).

If you have not yet maximized your 401(k) contribution for this current year, you may want to change your contribution percentage before the end of the year. You can increase the percentage of your salary that is contributed (and reduce your take-home pay). Contributions to deferred plans reduce your current taxable income.

Retirement Plan Contributions for 2014

The IRS has left retirement plan contributions for 2014 at the same levels as 2013. But the thresholds for qualifying for Roth IRAs is increasing slightly. If your adjusted gross income is less than $129,000 (for singles) or $191,000 (for married persons filing jointly) then you are eligible to contribute to a Roth IRA. Eligibility starts to phase out if you earn more than $114,000 (singles) and $181,000 (couples).

Year-End Tax Strategies

If you want to reduce your taxable income for 2013, you may consider paying off more expenses that you can deduct. For example, some people will prepay their real estate taxes, homeowner’s insurance premiums or make mortgage payments in advance that would normally be due in early 2014.

Deductions for Medical Expenses

For 2013 the amount of medical expenses required to reach the deductible threshold has increased for people under age 65.  You must have medical expenses greater than or equal to 10% of your adjusted gross income in order to be able to deduct them. People aged 65 and older only need expenses of 7.5% through 2017.

Health Insurance Individual Mandate

Beginning in 2014, individuals are required to carry health insurance either through their employer or individually. In order to set an individual plan in place for a January 1, 2014 effective date, people shopping on the government Insurance Marketplace (http://www.healthcare.gov) and for New Yorkers (http://www.nystateofhealth.com) must sign up for (and pay for) a plan by December 23, 2013. The actual mandate kicks in March 31, 2014.

Health Savings Account Contributions

If you have a high-deductible health insurance plan that includes a tax-preferred Health Savings Account, you can still maximize your contributions for 2013. The contribution limit for 2013 is $3,250 for individuals and $6,450 for families. The maximum takes into account both employer and employee contributions to the HAS. For those 55 and older the maximum is increased by $1,000.

Social Security and Medicare in 2014

The Social Security Administration will increase benefits by 1.5% in 2014. Medicare Part B premiums will remain at $104.90 per month, but high-income individuals will see the surcharge for Part B and Part D increase slightly.

 

Production of SIU Documents

When seeking production of documents from a non-party, it is important to remember that it is not sufficient to only show relevance; it must also be unfair to proceed to trial without the documents.

In Boucher (Litigation Guardian of) v. Charles, 2013 ONSC 3120 (S.C.J.), the plaintiffs brought a r. 30.10 motion to obtain documents from a non-party, the Special Investigations Unit (SIU).  The action arose out of an accident between a cyclist and a police motor vehicle.  The SIU conducted an investigation and concluded there were no grounds to lay criminal charges against the officer.

In a r. 30.10 motion for production of documents from a non-party, the moving party must satisfy a two-part test: 1) the document must be relevant to a material issue in the action and, 2) it would be unfair to proceed to trial without having discovery of the document.  The test sets a high bar and is permissive rather than mandatory (i.e. if it is met, the Court may order production).

The SIU conceded relevance of all of its documents except for statements from two civilian witnesses who did not witness the event.  Master McAfee held that the documents were relevant, but the plaintiffs were not able to meet the second part of the test.  The witnesses had not consented to release of their statements, and the statements of witnesses given to police officers had been produced in the police file.  Master McAfee also considered the public interest.  The efficacy of the SIU's investigative process and its ability to discharge its mandate depends on maintaining the confidence of witnesses. 

Master McAfee ordered production of a statement by a deceased witness as he would not be available to testify at trial or to provide consent to release the statement.  The plaintiffs were not able to show that they would be prejudiced by proceeding to trial without the remaining documents.

The Onus at Status Hearings

The decision of Master Hawkins in 1745361 Ontario Ltd. v. St. Paul's Investments, 2013 ONSC 4642 (S.C.J.) reminds us that the onus at a status hearing is on the plaintiff.

In this case, there was a delay of between 13 and 25 months, depending on whether or not the plaintiff had served an affidavit of documents (the parties disputed whether it had been served).  The plaintiff also failed to comply with the Master's Order that it deliver material for a status hearing.

Master Hawkins emphasized that Rule 48.14(13) places the onus on the plaintiff to persuade the court that the action should not be dismissed for delay.  The plaintiff must demonstrate that he, she or it has an acceptable explanation for the delay, and that if the action is allowed to proceed, the defendant will suffer no non-compensable prejudice.

The plaintiff's affidavit used at the status hearing provided no explanation for the delay and was silent on the issue of prejudice to the defendant.  On the contrary, the defendant delivered an affidavit setting out that two critical witnesses had disappeared.  Accordingly, the plaintiff had failed to discharge its onus under r. 48.14(13) and the action was dismissed.

Although the onus is on the plaintiff, one has to assume that the affidavit filed by the defendant setting out the prejudice it suffered as a result of the delay was helpful to the Court.

Excess Insurance

Excess insurers may be interested in the recently reported decision of ACE INA Insurance v. Associated Electric & Gas Insurance Services Ltd., [2012] O.J. No. 6500 (S.C.J.).

ACE insured Toronto Hydro, which was sued over an explosion that occurred in the underground parking of a high-rise apartment building.  AEGIS was the excess insurer.  Although there was no explicit duty to defend under the AEGIS policy, ACE brought an application that AEGIS had a duty to pay defence costs pursuant to the doctrine of equitable contribution.

The AEGIS policy was an "indemnity policy" rather than a "liability policy".  Under its policy, AEGIS limited its indemnity obligation where there is other insurance, and limited its duty to indemnify to defence costs incurred by the insured, not those incurred by a third-party such as ACE.  Defence counsel had been appointed by ACE rather than the insured.  AEGIS's obligation was only to indemnify defence costs at the end of the litigation, where the costs were not covered by other insurance.    

Justice C.J. Brown rejected the argument that AEGIS had an equitable duty to contribute to defence costs despite the clear wording of the policy.  There is no equitable obligation to defend where an excess policy precludes a duty to defend.  In addition, a relevant factor was that any defence costs paid by AEGIS would reduce the policy limits available to the insured so there was potential prejudice to Toronto Hydro.