What is the Law In New Jersey When a Decedent Fails to Maintain Mandatory Life Insurance to Pay Alimony and Child Support?

By Fredrick P. Niemann, Esq. of Hanlon Niemann Wright, a Freehold, NJ Estate Probate and Litigation Attorney

A recent Appellate court case provides some strong guidance to estate representative(s) (executor, trustee, administrator) when life insurance is mandated in a judgement of divorce for the benefit of a surviving beneficiary and it either lapses or incorrectly names the mandatory beneficiary. In this case a couple married and had a child. They were later divorced. When the husband died, he was survived by his minor child as well as an emancipated adult child from a prior relationship.

Before the marriage, the decedent enrolled under a group life insurance policy through the police and firemen’s retirement system of New Jersey, naming his parents as beneficiaries and his ex-spouse as the contingent beneficiary. When they divorced, the couple entered into a settlement agreement, later incorporated into a Dual Final Judgment of Divorce, which made the following provision with respect to the life insurance policy:

LIFE INSURANCE – The Husband presently has life insurance on his life with a face amount of approximately $200,000.00. He shall name the minor child as beneficiary of $150,000.00 of that policy naming Wife as trustee. Husband shall continue this policy until the child is emancipated. Husband shall also maintain $50,000.00 of said policy naming Wife as beneficiary to secure his alimony obligation. This requirement for Husband to maintain life insurance naming Wife as beneficiary shall terminate upon the termination of alimony.

Husband died intestate (meaning without a Last Will) and his adult son was named administrator of the estate.

At the time of his death, he had not named his minor child as the beneficiary of the life insurance policy. His parents (the primary beneficiaries under the original policy language) had predeceased him and his ex-spouse as contingent beneficiary under the original policy language was revoked upon their divorce, pursuant to N.J.S.A. 3B:3-14. The policy provided that in the absence of a beneficiary, the policy proceeds would be payable to the insured’s estate.

The administrator sought an order distributing the insurance proceeds pursuant to the judgment of divorce. The chancery judge granted this relief, finding that the decedent’s failure to revise the beneficiary designation to secure his child support and alimony obligations did not defeat the judgment of divorce. The chancery judge reformed the policy accordingly.

The judge also ordered that the remaining proceeds be paid to the minor child’s mother as trustee for the minor child. In so doing, the judge noted that the child’s projected child support through emancipation would probably equal that amount; therefore, there would be no windfall to the child as a result of the order. The adult child appealed.

The Appellate Division affirmed and stated the following proposal, “when support is secured by a life insurance policy and the policy fails to provide such security because the policy names an incorrect beneficiary, the court may impose a constructive trust on all or a portion of the life insurance proceeds after the obligor’s death.” A constructive trust is warranted when the following two-prong test is satisfied:

First, a court must find that a party has committed “a wrongful act”. The act, however, need not be fraudulent to result in a constructive trust; a mere mistake is sufficient for these purposes. Second, the wrongful act must result in a transfer or diversion of property that unjustly enriches the recipient.

Here, the Appellate Division noted that the decedent’s failure to amend the policy beneficiary was a “wrongful act” that would result in the diversion of proceeds that would trump the property settlement agreement, and would constitute an unjust enrichment.

For these reasons, the Appellate Division concluded that the chancery judge’s reformation order was a proper exercise of her judicial authority to impose a constructive trust on the police proceeds.

This Appellate case affirming a similar outcome in a case I argued before the Appellate Division in 2010 which involved an estate that had significant life insurance and assets and where the decedent failed to name his minor child as beneficiary.

To discuss your NJ Estate Probate and Litigation matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing consultations if you are unable to come to our office.