Canada: Support Payor's Death Leads To Complex Court Case Involving Estranged Wife, Fiancee And An Unborn Child

Before Stephen died, he prepared a will — contrary to a court order — that split his life insurance between his two families. That's when the lawyers got involved

When people separate and re-partner, life can be complicated. But when someone who may be supporting two families passes away, the problems can become even stickier.

Dagg v. Cameron, a recent decision of Ontario's Court of Appeal, dealt adeptly with this issue, and solved a conundrum which has faced family and estates lawyers for several decades.

When the Cameron family first found their way into court, there was nothing unusual about their case. Stephen and Anastasia Cameron had been married for a number of years and had two young children. Stephen consented to a court order to pay child and spousal support to Anastasia and agreed to the usual court order that he maintain Anastasia as the irrevocable beneficiary of his life insurance policy.

In family law, life insurance is often required to provide security for support in the event of the death of the payor. Some court orders and agreements state that the amount of life insurance reduces over time, as the payor's support obligation reduces. Children, after all, grow up and eventually are no longer entitled to support, and spouses may have a time-limited support entitlement.

This was not the case with the Camerons, however: Stephen's obligation was to maintain his $1,000,000 policy, with no reduction or end date.

After Stephen and Anastasia separated, Stephen rekindled a relationship with an old acquaintance, Evangeline, who lived in the United States. They saw one another as regularly as possible, given the distance between them.

To complicate things further, Stephenu2019s estate was insolvent: the only asset was the life insurance

Sadly, Stephen was diagnosed with cancer. Evangeline became pregnant with Stephen's child, and they decided to marry, but Stephen died before his divorce with Anastasia was finalized, and Evangeline and Stephen never married. Stephen never met the son to whom Evangeline gave birth after Stephen's death.

Before Stephen died, he prepared a will, contrary to the court order, that split his estate and his life insurance between Anastasia and their two children, and Evangeline and their as-of-yet unborn son.

To complicate things further, Stephen's estate was insolvent: the only asset was the life insurance.

These circumstances spawned a trial and two appeals. Three different courts struggled with the overlapping and intricate web of family and estates legislation and how Stephen's estate and life should be divided between the two families.

In Ontario, when a person dies, the Succession Law Reform Act may apply. (All provinces have similar legislation.) Among other things, the Act addresses "dependant's relief claims."

"Dependant's relief" may be available to a person who is a "dependant" of the deceased, defined as a spouse, parent, child or sibling to whom the deceased was providing support, or to whom he had a legal obligation to provide support, immediately before his death. A spouse includes married spouses, as well as common law spouses who have lived together for three years. But if a common law couple has had a child, the survivor need only have been in a "relationship of some permanence" to be entitled to dependant's relief. 

What is interesting about dependant's relief — which in simple terms is just a share of the estate — is that the Act says that the estate does not just consist of the assets the deceased owns when he dies.

For the past forty years, the Succession Law Reform Act has contained draconian provisions which allow a court to claw back assets into the deceased's estate to satisfy dependant's relief claims. The assets that can be clawed back include property held by the deceased in joint tenancy with another person at the date of death, or life insurance owned by the deceased which designates a named beneficiary other than the dependants.

In Dagg v Cameron, when Stephen split the life insurance that he had already agreed to hold only for Anastasia and the children, family law and estates law were set on a collision course.

There was no doubt that Anastasia and her two children were dependants of Stephen's estate: At the time of his death he was under a court order to pay support and maintain life insurance to secure the support. While Evangeline was not yet married to Stephen, she later gave birth to his child. At an interim stage, the court found that the baby was a dependant and that Evangeline was a 'spouse', but wanted more evidence about whether Evangeline was a 'dependant'. Ultimately at trial, Evangeline was found to be a 'dependant'.

The judge found that all of the $1,000,000 of life insurance could be clawed back into the estate, and as Anastasia was not a secured creditor, she and her children had no priority over Evangeline's claims.

At the first level of appeal, the Divisional Court upheld the trial judge.

The Court of Appeal came to a different conclusion. While the Court of Appeal agreed that the life insurance could be clawed back into Stephen's estate, it went on to find that Anastasia had rights as an unsecured creditor, because the consent court order required that she be named as irrevocable beneficiary of the life insurance.

Although the court decided that Anastasia and her children were creditors, the court limited their rights. The court found that they were creditors only to the extent that the policy's proceeds were necessary to satisfy Stephen's obligations for the remaining support payable to Anastasia and the children: any amount remaining would form part of the estate for dependant's relief for Evangeline and her son.

Because most child and spousal support agreements and court orders require a payor to maintain life insurance, the outcome gives first families a reason to breath a sigh of relief if the worst happens.

Payors who have re-partnered, however, ought to make careful plans to  ensure that their new family unit is also protected.

Originally published by Financial Post.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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