The New Hampshire Supreme Court recently issued an opinion indicating that life insurance proceeds could be considered income of an individual for purposes of calculating the child support obligation of that individual. In the Matter of Mary Beth Larocque and George W. Larocque, 2011-0734 opinion issued August 31, 2012. The Court's decision was a surprise to many family law attorneys and estate planning attorneys alike.
The father in the Larocque case did not pay his full child support obligations for many years. When his second wife died and he received $500,000 of life insurance proceeds, the first wife attempted to collect past due child support. The father objected and requested a modification of his child support. The trial court granted his request, but included the life insurance proceeds as part of his gross income. Life insurance proceeds are not specifically included in the statutory definition of gross income for purposes of calculating child support.
Life insurance proceeds seem more like a lump-sum inheritance or gift and less like a payment of periodically recurring income. This may be why many attorneys expressed concern when the New Hampshire Supreme Court upheld the trial court's determination that life insurance proceeds fall within the definition of gross income and included the life insurance proceeds when calculating child support.
Going forward, if this is not the result that the owner of a life insurance policy would want, it is possible to plan around it. At Ansell & Anderson, we will now advise clients with a spouse or an adult child who is subject to a child support order about these issues. If the client would not want the life insurance proceeds to effect the beneficiary's child support obligation, the client has options. One option is to give the beneficiary who is subject to a child support order less liquid assets, such as real estate, and give life insurance proceeds to other beneficiaries who are not subject to a child support order.
Another alternative is to have the life insurance proceeds payable to a trust for the benefit of the individual who is subject to the child support order. Certainly if the life insurance proceeds in the Larocque case had been paid into a trust and the trust restricted the father's access to the life insurance proceeds, the Court would not have considered the entire $500,000 as gross income. Depending on the terms of the Trust, the income from the Trust (interest or dividends on the underlying investments) may be considered gross income, but as long as the trust beneficiary's access to the principal is restricted, the trust principal should not be considered gross income for purposes of calculating child support.