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of creditor risk and the development of a strategy for acquiring creditor
protected assets is an essential element of every good estate plan. In an effort to provide financial security
for a loved one upon death, certain creditor protection benefits exist for life
insurance policies. New York's statutory
scheme is complex and the creditor protections afforded to life insurance
policies are in large measure dependent on the identities of the policy's
owner, beneficiary, and insured.
Generally speaking, New York's protection against creditors extends to
the death benefit, cash surrender value, and available loan value of life
insurance policies. For example,
pursuant to New
York's Insurance Law Section 3212(b)(1), an insurance policy that the debtor
owns on his life for the benefit of his wife is exempt from the debtor's
creditors. Also, when the owner of the
policy is a life insurance trust (frequently utilized to avoid estate taxes),
the creditors of the creator of the trust cannot reach the policy.
The exemption statute is for the protection
of the beneficiary and not the debtor.
In protecting the beneficiary, creditors of the owner cannot force the
owner to surrender the policy or borrow against the policy to the detriment of
the third party beneficiary. See In
re Jacobs, 264 B.R. 274 (Bankr. W.D.N.Y. 2001). However, it is important to note that loans
actually taken by the debtor-policy owner are not protected under the statute
because the debtor has full control and disposal of the proceeds. See Tanges v. Schonbrun, 196 N.Y.S.2d 381 (Nassau County Supreme
1959). Additionally, protection from
creditors under New York's Insurance Law Section 3212(e) does not exist when funds
are contributed to a life insurance policy with the actual intent to defraud
existing creditors as provided under New York's Debtor and Creditor Law.
Subject to the exceptions and limitations
discussed above, making contributions to life insurance can offer excellent
creditor protection. It is important to
keep in mind that these protections are not always absolute, other limitations
may apply in bankruptcy, and once funds are withdrawn from these protected assets,
they become accessible to creditors.
David R. Schoenhaar is an associate at Ruskin Moscou Faltischek where
he is a member of the firm's Trust & Estates Department.