It often comes up that a client receives life insurance proceeds pursuant to a deceased family member’s death during their marriage. Often times, the amount is large, and when the client separates from his/her spouse, the spouse thinks they are entitled to it. It may sound a bit greedy, but from a practical perspective, there can be many reasons why a spouse may want an equitable share of the proceeds. Maybe the parties had discussed plans during the marriage for what they would do with the proceeds and relied on those plans. Maybe they bought a house with it, or maybe they saved it for their future and spent their other savings. The general rule is that inheritances are separate property. But life insurance is not considered an inheritance because it doesn’t pass through the will and is not part of the probate estate. So is it marital property or not? The answer is: it depends. It depends on if it was a gift. Gifts are usually considered separate property. How do we tell if it was a gift? The court of appeals recently addressed this very issue in Richter v. Richter in their opinion on June 2, 2020.
In this particular case, Mr. and Mrs. Richter (hereinafter referred to as “Husband” and “Wife”) were married for five years and lived in Iredell County together until they separated in 2017. Husband had previously been married and was divorced. Husband’s ex-wife (hereinafter referred to as “Ex-wife”) who he shared children with, had a terminal illness and died, leaving Husband life insurance proceeds of approximately $500,000 during the marriage of Husband and Wife. Husband put the proceeds into a retirement account, and later transferred some of them to other retirement accounts and also bought a house with a portion of the proceeds.
The question before the Court of Appeals was whether or not these life insurance proceeds were the separate property of Husband. The trial court in Iredell County found that they were a gift and were therefore, Husband’s separate property. The Court of Appeals affirmed the trial court’s ruling. A few things the court considered were:
1) Husband did not have a contractual right to the proceeds and no consideration was given for them. This made me wonder if the proceeds had been his right from a separation agreement with Ex-wife, would the court have found differently?
2) Neither Husband nor Wife owned the policy. Ex-wife owned the policy.
3) There was no marital contribution to the premiums and neither Husband nor Wife paid any premiums for the policy. They distinguished the Richter case from the Crago case, where the parties had made premium payments with marital funds and therefore, a portion of the proceeds were marital.
4) It was received during the marriage and prior to separation. The court said if the proceeds were received after separation, Wife would definitely not have a claim to them. However, even though in this case they were received during the marriage, because of the first three considerations above, Wife still did not have a claim to the proceeds.
5) The Court suggested that there could be an analysis done as to whether or not the deceased Ex-wife had “donative intent” which is usually required for an inter-vivos gift (a gift during the life of the donor). They considered all of the surrounding circumstances: how Ex-wife gave Husband custody of the children when she got ill; she made Husband executor of her Last Will and Testament; she left her estate to the children in trust and made Husband the Trustee; she executed a power of attorney and made Husband her attorney in fact; she made her sons beneficiaries of her IRA accounts. All of these factors suggested that Ex-wife’s life insurance proceeds were a gift to Husband and that she had donative intent. They seemed to indicate donative intent on a gift that was made after death would not be dispositive of the issue but was worth considering.
Wife also tried to argue that the assets that flowed from the proceeds (the other accounts and the house) were not part of the “gift” because Husband had comingled the funds with marital assets which were acquired during the marriage. The trial court in Iredell County considered the source of the funds for the house and the fact that the parties had made marital contributions to make improvements on the house after it was purchased, which increased the value. The trial court found the house was part separate and part marital, with the marital portion being the increase in value from the marital contributions. The Court of Appeals upheld this finding. The Court of Appeals also upheld the finding that the other two retirement accounts which were funded with the life insurance proceeds should be classified as Husband’s separate property because their source of funding was from the gift.
Bottom line legal advice: life insurance proceeds might be considered your separate property if you did not own the policy, did not pay the premiums, did not have a contractual right to them, and did not give any consideration for them. It is also important not to comingle life insurance proceeds with other marital property or joint accounts. If you are going to buy a house with it, do not title it jointly.
It was a sad story about what happened to Ex-wife, and unfortunately it ended up in lengthy litigation between Husband and Wife which did not resolve for almost four years. It makes you wonder if Ex-wife intended for such conflict. This could also be a lesson for those of us who have their adult child as beneficiary on their life insurance policy to potentially write a donor letter indicating the proceeds are intended as a gift to their child and not their spouse. Can’t hurt right?Life Insurance is a topic that many don’t like to discuss and leave it for another time. Do I need life insurance, how much does it cost, up to what amount can
I have life insurance for?— These are some of the initial questions you can start with in order to find the policy that can protect your family in case of the unexpected. There are many options and no matter which one you choose, make sure to read the fine print and understand how it works. Another important step is to designate beneficiaries! Review several life insurance companies first so you can compare pricing and policies.
