LIFE INSURANCE PROCEEDS PAYABLE TO TRUST ARE EXPEMT FROM CREDITOR CLAIMS
By Kent Berk on February 8th, 2013 in BLOG, Probate, PROBATE LITIGATION, TRUST DISPUTES
In Estate of King, the Arizona Court of Appeals ruled that Arizona Revised Statute 20-1131(A)* (protecting life insurance proceeds from creditor claims) still applied even though the life insurance proceeds were payable to a trust and the trust agreement generically directed the trustee to pay the deceased’s expenses.
Kathryn King had created a trust. Her minor son was the sole beneficiary of the trust. She purchased a $2 million life insurance policy and named the trust as the sole beneficiary. She died in November 2008. When she died, her debts exceeded the value of her estate. She had various real estate and other loans which the estate could not afford to pay without the life insurance proceeds. So, the creditors claimed that the estate was obligated to use the life insurance proceeds to pay their claims.
Specifically, the creditors argued that Section 20-1131(A) only exempted the life insurance proceeds from creditor claims if the life insurance was payable to a third-party. They claimed that since the trustee of the trust was King’s legal representative that the exemption did not apply. The Court disagreed.
“Life insurance proceeds paid to a decedent’s beneficiary are exempt from claims of creditors of the decedent’s estate pursuant to A.R.S. § 20-1131(A). We hold that the language of § 20-1131 is broad enough to also protect such proceeds when they are paid to a trust created by the insured in which the beneficiary is a third party.” The Court explained that a trust was an “entity” and that “entity” is included in the definition of “person” under Title 20 of the Arizona statutes.
The fact that King was the trustee of the trust at the time that she purchased the policy did not change the Court’s decision. ”The Trust was the owner and beneficiary of the policy, and the policy was an asset of the Trust. As the Louisiana Court of Appeals aptly stated, an insured’s creditors cannot reach life insurance proceeds on the life of the insured because the proceeds ‘do not come into existence during his life, never belong to him, and pass by virtue of the contractual agreement between the insured and the insurer to the named beneficiary.’”
Thus, the Court found that the life insurance proceeds were exempt from the creditor’s claims pursuant to the statute. The Court went on to analyze whether the directive in the trust to the trustee to pay various of King’s expenses constituted a waiver of the statutory exemption. The Court held that there was no waiver based on the merely generic directive to pay expenses in the trust and the absence of any specific directive to use the life insurance proceeds to pay such expenses if other assets were insufficient.
* Ariz. Rev. Stat. Ann. § 20-1131(A) provides that “If a policy of life insurance is effected by any person on the person’s own life or on another life in favor of another person having an insurable interest in the policy, or made payable by assignment, change of beneficiary or other means to a third person, the lawful beneficiary or such third person, other than the person effecting the insurance or the person’s legal representatives, is entitled to its proceeds against the creditors and representatives of the person effecting the insurance.”
The probate lawyers at Berk Law Group, P.C. handle virtually all types of estate, trust, will and probate disputes. If you or someone you know has an inheritance, estate or trust-related dispute, please contact us.
Read more about creditor claims in Arizona probate and life insurance exemptions from creditor claims. Learn more about Arizona trustee and personal representative duties and powers.
