Court Resolves Conflicting Provisions In Divorce Settlement Agreement And Life Insurance Beneficiary Designations

Thomas v. Thomas, Docket No. A-2388-11T2 (N.J. Super. App. Div. June 4, 2013), involved competing claims against a $1 million life insurance policy maintained by the decedent.

Mr. Thomas was survived by a wife, as well as an ex-wife, with whom he had 2 children. Pursuant to the Property Settlement Agreement (“PSA”) between Mr. Thomas and his ex-wife, he was to pay permanent alimony and pay child support until the children’s emancipation. He was also required to maintain life insurance irrevocably naming his ex-wife as beneficiary of $500,000 and each child as beneficiary of $125,000.

Article V provided that the obligation to maintain insurance for the ex-wife “shall terminate upon the termination of [the] obligation to provide alimony… or be modified if the alimony obligation is modified” and the obligation to maintain the children’s insurance “shall terminate upon emancipation.” Subsequent consent orders modified the PSA by declaring each child emancipated, and reducing alimony to the ex-wife. There was no specific modification of the life insurance obligation to the ex-wife. (The opinion is silent as to whether there was a specific modification of the life insurance obligation with respect to the children, once they were declared emancipated. However, the parties’ argument regarding whether the Article V termination provisions were “self-executing” was limited to the issue of the ex-wife’s portion of the life insurance).

In August 2007, Mr. Thomas advised his children that, as part of the PSA, he had a life insurance policy naming the ex-wife as beneficiary, and that he chose to keep the children as 12.5% beneficiaries of the life insurance, despite emancipation. This information accurately reflected the terms of the policy at that time.

In 2008, Mr. Thomas remarried. He later attempted to obtain additional life insurance, but learned that he had cancer and was uninsurable. Without advising his ex-wife, in 2009 Mr. Thomas changed the existing policy designation as follows: 60% to his current wife, 15% to his ex-wife, and 12.5% to each of his children. He died in 2011. After conflicting proofs of claim were filed, the ex-wife sought to impose a constructive trust on the life insurance proceeds, and the current wife cross-claimed, and sought to retroactively reduce the amount of life insurance for the ex-wife based on his date of death alimony obligation to her.

The trial court concluded that the ex-wife was entitled to 50% of the proceeds pursuant to the PSA, finding that the decedent had wrongfully reduced her benefit; that the children were each entitled to 12.5%; and that the current wife was entitled to the remaining 25%.

The Appellate Division affirmed with respect to the ex-wife’s award, finding that the termination provisions in Article V of the PSA were not self-executing; and that the decedent’s wrongful amendment of the beneficiary designation entitled the ex-wife to a constructive trust on 50% of the proceeds.

However, with regard to the awards to the children and the current wife, the Appellate Division reversed. It found that the 2009 beneficiary designation “gave each of them a vested interest in the insurance proceeds without any preference.” Therefore, the court ordered that the remaining $500,000 be proportionally distributed in accordance with the decedent’s intent, as expressed in that beneficiary designation, such that the current wife would receive 71% of the remaining $500,000 and the children would receive a total of 29%.

A copy of the Thomas decision can be found here: Thomas v. Thomas