Estate planning and asset protection have to work together. Small estate planning errors can undermine an otherwise effective asset protection plan after the debtor’s death. A Florida appeals court issued a ruling recently where a debtor’s life insurance policy intended for the benefit of his children ended up in the hands of his creditors after his death.
The decedent/debtor owned a life insurance policy on his own life in the amount of $250,000. He had living trust leaving everything equally to his children. The life insurance policy designated his living trust as its beneficiary. The living trust had a provision that directed the successor trustee to pay all of the decedent’s enforceable debts. The decedent’s creditor sought to require the trustee to pay from the living trust the life insurance proceeds to the extent necessary to satisfy the creditor’s money judgment against the decedent.
The case involved two Florida statutes. Statute 222.13 provides that life insurance proceeds pass to the insured’s beneficiaries and cannot be seized by the decedent’s lifetime creditors. Statute 733.808(1) states that life insurance proceeds paid to a trust shall be disposed of under the terms of the trust agreement.
The court held that the trustee must pay the judgment with the life insurance proceed payable to the trust. The court also rejected the trustee’s request to reform ( amend) the trust after death on the basis that the decedent intended that the life insurance proceeds be paid for the benefit of his children rather than his creditors. The court saw evidence that this decedent read and understood the trust agreement and that he knowingly designated the trust as the beneficiary of the insurance policy to provide liquidity for his estate.
The better estate plan would have been to purchase and hold the insurance policy in a separate life insurance trust which gave the insurance trustee discretion to either pay beneficiaries of the estate, but did not require payment of claims. The proceeds of the life policy held in the insurance trust would have been fully protected from the creditors of both the decedent and his children . Morey v. Evergank