An important aspect of any divorce agreement is not only what you agree on but how and whether the agreement can be enforced. In their Marital Settlement Agreements (MSAs), divorcing parties set out the terms they agree upon for:

• the custody, placement and support of their children,

• the division of their debts and assets, and

• their obligations to one another’s support called maintenance or alimony.

This agreement is almost always then incorporated into the court’s order as part of the divorce and once incorporated into the divorce, the agreement become the court’s decree.

In drafting such an agreement, parties often pay less attention to the provisions that include how the terms of the MSA will be enforced if one of the parties does not follow its terms. A recent Wisconsin Supreme Court decision reminds us of the importance of those provisions when it interpreted a section of the agreement regarding life insurance coverage.

Marital Settlement Agreements frequently include life insurance sections that require parents to name their minor children as the beneficiaries of life insurance policies for so long as the children are minors and sometimes even longer. The purpose is to serve as income replacement to cover the child support and additional ongoing living expenses for the children, who are now living only with one parent, as well as replacing the deceased parent’s contributions to medical premiums for health insurance coverage for the children, unreimbursed medical expenses for the children and “variable expenses” such as day care and extracurricular activities.

Problems can arise if the person who was to name the children as beneficiaries remarries and names the new spouse and/or subsequent children as the beneficiaries. Usually, MSA terms include provisions concerning what options the nonbreaching party has in those circumstances to enforce or be made whole despite this violation.

On April 14, 2020, the Wisconsin Supreme Court addressed these issues in Pulkkila v. Pulkkila, 2020 WI 34, No. 2018AP712-FT (2020). James and Joan Pulkkila divorced in 2009. Their MSA required each of them to maintain their existing life insurance policy, or replace them with a comparable policy, and name their minor children as the beneficiaries of the policy as long as they were minors. Subsequently, in 2013, James married Lynnea and named her as the sole beneficiary of a life insurance policy he purchased before the divorce with a death benefit of $250,000. James died in 2015 (during the period the court order required the children to be beneficiaries) and the life insurance company paid the $250,000 death benefit to Lynnea, the named beneficiary.

James and Joan’s MSA provided that if a party failed to comply with the life insurance provisions, the surviving party could enforce a lien interest against the deceased parent’s estate. Unfortunately, James’ estate in probate was only worth $5,600 independent of the life insurance proceeds. A lien does not reach other assets that may pass to a beneficiary by other means. Those other means include designating a beneficiary on a retirement account or naming another on a deed as joint tenants with rights of survivorship where the property automatically passes to the other party on the deed. A lien only reaches assets that are part of a probate.

Joan filed a motion asking the court to order that Lynnea return the $250,000, and the court to take control over the $250,000 by creating a “constructive trust” which would allow the court to determine to whom the proceeds be distributed, presumably James’ minor children. A constructive trust is created by the courts outside any formal statute but tries to bring equity or fairness to a situation and create remedies that try to reach the intent of a law or agreement and not allow one person to be “unjustly enriched” by the application of a law or agreement.

In Pulkkila, the trial court denied Joan’s request for a “constructive trust”, saying the filing of a lien against James’ estate was her only recourse because that is the remedy to which she and James agreed. In essence, this meant that James’ children would only get $5,600, not the $250,000 the MSA intended. The court of appeals rejected the circuit court judge’s decision and imposed a “constructive trust” on the insurance proceeds. Lynnea appealed to the Wisconsin Supreme Court.

The Wisconsin Supreme Court ruled that filing a lien was not Joan’s exclusive remedy, stating that while the children could use that remedy, there were other equitable remedies available as well. Then the Court directed the trial court judge to hold a hearing on whether it was appropriate to impose a “constructive trust” as a remedy, sending it back to the trial court for a hearing.

Ensuring that the parents’ intent for life insurance provisions is enforced and that proceeds be paid to the person named under the Marital Settlement Agreement has many seemingly unsolvable situations. In the Pulkkila case, the Pulkkila decision of the Supreme Court is only the beginning of this journey for the parties as they now have to go back to the trial court to determine if a constructive trust is appropriate and available, and participate in more expensive court hearings to determine the facts and remedies. Lynnea may have already spent the proceeds from the life insurance by the time the court hears the case, effectively making this into a situation with no remedy.

The challenges the Pulkkila trial court faces illustrate the importance of matching intent with implementing language in the MSA.

As attorneys draft these agreements, there are many possible options:

1. If the parties in fact intended to make the lien the exclusive remedy as a bargained provision of the agreement, create more specific and clear language in the MSA.

2. Expressly provide for a broader remedy than a lien; put in language to create a constructive trust on all assets that are owned by the deceased at the time of death. As stated earlier, a lien can help you reach assets that go through probate, but many assets do not get distributed that way so the lien may be ineffectual. In addition to deeds and beneficiary designations on retirement accounts, a person may create a “POD”—“paid on death”—account which passes automatically at the time of death. Many estate planners do all that they can to have their clients avoid dying with a probate estate. A Marital Settlement Agreement could include a trust of all assets to ensure that the money owed to the children is paid from any and all assets in the event there is a violation of the life insurance provisions.

3. Attorneys can send the MSA to the life insurance company, if the parties agree to a specific policy being designated for this purpose of protecting future support obligations, so that the life insurance company is on notice that there is a claim by the first family.

4. If it is a private insurance that is designated to protect the children in the future, rather than insurance through employment, the actual transfer of the policy to the other party as part of the division of assets is an option. Issues can arise about payment of premiums; one could set up an arrangement so the cost is paid as an addition to child support through a wage assignment. Issues may also arise about transferring the policy back after the children are no longer minors if the parties so intend.

5. Other options include bringing the life insurance company in as a party to the divorce so the court can order it not to distribute proceeds other than to the designated party in the divorce decree, or requiring the insured to write a letter to the company indicating it wishes there be no change to the policy without the other party’s permission.

Because there are many pitfalls but also many potential solutions contact Amy to discuss your individual case at (414) 221-6474 or Amy@AmyShapiroFamilyLaw.com