Most people correctly believe that life insurance proceeds are exempt from creditors’ claims in Florida.  That is an accurate paraphrasing of Florida Statutes, Section 222.13.

Most people incorrectly believe that it makes no difference who is the beneficiary of the life insurance policy because the death benefits are exempt from creditor’ claims.

The recent case of Kevin A Morey, as personal representative of the estate of Carlton W. Morey, Jr., and as trustee of the amended and restated revocable trust of Carlton W. Morey, Jr. vs. Everbank and Air Craun, Inc., Case 1D-11-1401, decided by the First District Court of Appeal on July 24, 2012, reminds us that it is very important to ensure the proper beneficiary designation is placed on all life insurance policies.  Failure to properly identify the beneficiary of a life insurance policy can result, as it did in the Morey case, in the loss of life insurance proceeds to creditors of the deceased person’s estate, when those death benefits could have been saved for the family with the proper beneficiary designation.

Life Insurance Death Benefits are Exempt from Creditors’ Claims – Generally

The applicable statute, F.S. 222.13, does specifically provide that death benefits of a life insurance policy are exempt from the decedent’s claims of creditors when the proceeds are paid to the beneficiary EXCEPT when one of two exceptions are present.

First Exception – Valid Assignment

The first exception is to accomodate common commercial business transactions. The death benefit will be paid to the named beneficiary, free of creditors’ claims, “unless the insurance policy or a valid assignment thereof provides otherwise.”  Obviously, if the owner of the life insurance policy has given a consensual lien or assignment of the life insurance policy as payment of an obligation or to secure a loan, or for any other of a myriad of reasons for giving a valid assignment of a life insurance policy, that assignment should be honored and the assignee of those death benefiits should be entitled to receive the benefits without regard to who the beneficiary may be.

Second Exception – Payable to Probate Estate

The second exception is the one that is the suprise to many – especially the beneficiaries of an estate, whether probate estate or trust estate.  The second sentence of FS 222.13 reads as follows:

“Notwithstanding the foregoing, whenever the insurance, by designation or otherwise, is payable to the insured or to the insured’s estate or to his or her executors, administrators, or assigns, the insurance proceeds shall become a part of the insured’s estate for all purposes and shall be administered by the personal representative of the estate of the insured in accordance with the probate laws of the state in like manner as other assets of the insured’s estate.”

The statute, in effect, says that life insurance death benefits are protected from creditors’ claims unless you name your estate as the beneficiary.  When you name your estate as the beneficiary of the life insurance proceeds, F.S. 222.13 directs that the estate shall include the life insurance death benefts for all purposes – including the payment of creditor claims. 
Thus, significant asset protection for the death benefits of a life insurance policy is lost when you name your estate as beneficiary of life insurance death benefits, or if for whatever reason your estate ends up being the beneficiary of the death benefits (for instance if your named beneficiary predeceased you and the insurance policy provided that if no named beneficiary survived you, then the death benefits would be paid to the estate of the insured.

What about your living trust? 

Can you name your living trust as the beneficiary of your life insurance death benefits and avoid creditor claims?

The short answer is . . . MAYBE!  At least that’s what the Florida First District Court of Appeal (DCA) said in the Morey case cited above.

Florida Statutes, Section 733.607, provides generally that is the assets of the probate estate are insufficient to pay all creditors’ claims and expenses of administration, that the personal representative of the probate estate may recover from the decedent’s revocable trust the amount of the insufficiency.  So, generally speaking if there are insufficient assets in the probate estate and there are assets in a revocable trust, then the trust assets are subject to satisfying the obligations of the probate estate.

In Morey, the decedent/insured designated the trustee of his living trust as the beneficiary of his life insurance policies.  In the trust, he had provided for a a testamentary trust he called the “Morey Family Trust.”  The Morey Family Trust was designed to provide benefits to his two daughters. The Morey Family Trust was to be funded with the assets from the “residuary” trust estate.  The “residuary” estate is the amount of the estate that is left over after all creditors of the deceased person’s estate have been paid, and all specific gifts by the deceased person have been distributed.

The beneficiary designation for the life insurance policy was the Trustee of the Carlton W. Morey Jr. Living Trust dated October 1, 2004.

As it turned out, Mr. Morey experienced some financial reverses during his final years and at the time of his death his real estate holdings had lost sufficient value that there was little if any equity remaining, and there were significant creditor claims to be paid by the estate.  The estate’s creditors made claims against the life insurance policies that were otherwise to be used to fund the “FamilyTrust.”  The Trustee of the trust sought to avoid the creditors’ claims on the basis that the life insurance death benefits were exempt from those claims.

The First DCA decided against the Morey estate and in favor of the estate’s creditors.  The foundation of the appellate court’s opinion is based on the plain language of the statute; i.e., that life insurance death benefits can be protected, but if they are made payable to the decedent’ s estate, then the life insurance proceeds become a part of the estate that is subject to creditors’ claims.  In this case, the beneficiary designation was to the trustee of the revocable trust – not to the trustee of the irrevocable testamentary “Morey Family Trust.”

The court reasoned that the decedent could have designated the beneficiary to be the testamentary Morey Family Trust and the death benefits would have been protected because the proceeds never would have become a part of the decedent’s estate.  However, since he designated the revocable trust as the beneficiary, and the terms of the revocable trust included a provision that required the trustee to pay all of the decedent’s final expenses and legally enforceable debts, the entire death benefit was subject to the creditors’ claims.

Importance of Beneficiary Designations

Obviously, this case, and the statute itself, make it clear that how a beneficiary is designated on your life insurance policy is critically important.  Such a designation is important even if you do not anticipate having creditors at the time of your death.  If there is the possibility you will have creditors at the time of your death, then it is even more important that the designation of a beneficiary be undertaken with great care and critical analysis.

Good estate planning and asset protection planning overlap and are sometimes at odds with each other, as this case suggests.  What may be desirable for estate planning purposes may not be desirable for asset protection purposes.  This case exemplifies the difficulty and the inherent conflicts that exist between the typical objectives of estate planning and the sometimes not so typical objectives of asset protection planning.  Inevitably, there must be trade-offs when considering whether to plan first for asset protection planning, or first for pure estate planning.

The difficult decisions, inherent conflicts, and competing objectives that arise when contemplating estate planning and asset protecdtion planning give rise to the need for experienced counsel to assist you with the evaluation of your options, some plain and simple and others complex and abstract.

If you have assets to protect, are concerned with the impact of estate taxes, former spouses, blended families, or have current or anticipated creditor issues, you need the assistance and counsel of an experienced group of advisors, including an attorney with real tangible experience.  “Simple” simply won’t work for you.

If we at The Coleman Law Firm can be of assistance helping you make these difficult decisions and evaluating the significance of conflicting concerns, please call us toll free at 888-492-2468 to schedule a consultation.

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