According to the 1st District Court of Appeals ruling in Morey 2004 v. Everbank, and Air Craun, Inc, 37 Fla. L. Weekly D1739 [enhanced version available to lexis.com subscribers], simple estate planning mistakes can defeat years of asset protection planning. In Morey 2004, both the trial court and 1st DCA held that life insurance proceeds payable to a trust were not, by virtue of the provisions on the subject in the trust instrument, exempt from the claims of creditors of the decedent's estate. As a result, the proceeds of a decedent's life insurance policy, which were intended for the benefit of his children, were paid to his estate creditors.
In Morey, the decedent established a Revocable Trust on January 19, 2000 (the "Trust") and in the following month applied for two life insurance policies each with a $250,000 death benefit. The decedent named the Trust as the beneficiary of each life insurance policy. Subsequently, on October 1, 2004, the decedent amended the Trust and included a provision that specifically required the successor trustee to pay to his personal representative such amounts as necessary to pay for all of his estate debts as required under Florida law. The balance of the Trust was then to be paid to the decedent's children.
After the decedent's death, the successor trustee petitioned the probate court requesting a determination that the life insurance proceeds payable to the trust were exempt from all "death obligations" and unavailable to the estate or its creditors. The successor trustee relied upon section 222.13(1) of the Florida Statutes which provides "[w]henever any person residing in the state shall die leaving insurance on his or her life, the said insurance shall inure exclusively to the benefit of the person for whose use and benefit such insurance is designated in the policy, and the proceeds thereof shall be exempt from the claims of creditors of the insured unless the insurance policy or a valid assignment thereof provides otherwise." The successor trustee argued that despite the fact the life insurance proceeds were payable to the Trust, rather than directly to the decedent's children, did not deprive them of their exempt status.
In response the estate creditor argued that section 733.808(1) of the Florida Statutes provides that life insurance proceeds payable to a trust "shall be held and disposed of by the trustee in accordance with the terms of the trust as they appear in writing on the date of the death of the insured." In addition, while section 222.13(1) of the Florida Statutes exempts life insurance proceeds from a decedent creditors it does not require the policy's owner to take advantage of the exemption.
The trial judge concluded that the terms of the Trust were unambiguous and "provided the priority and order of distribution and payment of Trust assets, mandating the payment of the estate's expenses and obligations before the distribution of the residue, if any." The 1st DCA concurred and found no reason why the exemption under section 222.13(1) of the Florida Statutes which renders life insurance policy proceeds unavailable to satisfy an estate obligation can't be waived.
From a Florida estate planning perspective, the decedent would have been better served by purchasing and holding the life insurance policy in a separate life insurance trust or including a provision in their revocable trust which specifically exempts any life insurance policy proceeds, that may be payable to the revocable trust, from the creditor claims of their estate. This type of scenario could also occur with a life insurance policy when a designated beneficiary is deceased and no contingent remainder beneficiary is designated. The policy proceeds would then be distributed to the decedent's estate and expose them to the decedent's creditor claims.
View more information from Marc J. Soss at http://www.fl-estateplanning.com/ and http://info.fl-estateplanning.com/
Marc Soss' practice focuses on estate and tax planning; probate and trust administration and litigation; guardianship law; and corporate law in Southwest Florida. Marc is a frequent contributor to LISI and has published articles and been quoted in the Florida Bar, Rhode Island Bar, North Carolina Bar, Association of the United States Navy, Lawyers USA, Military.Com, Forbes.Com, and CNN Business. Marc also serves as an officer in the United States Naval Reserve.
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Proper estate planning and insurance are important to get right the first time. Thanks for pointing out what should have been done in this instance.