Protect Life Insurance Payouts from Creditors with Trusts – Part 1
By: Barry E. Haimo, Esq.
July 21, 2015
Life insurance can be a valuable financial asset and effective estate planning tool. As a general rule, the proceeds of a life insurance policy are paid to a designated beneficiary avoid probate and are protected the claims of the deceased’s creditors.
Section 222.13, Florida statutes, states:
“Whenever 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. 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.”
Since the proceeds of life insurance policies are exempt from creditors, by setting up a life insurance policy, you can ensure that a certain amount of money will go to your family or chosen beneficiary without having to worry about that money being used to pay off your debt after your death.
However, as with many estate planning and legal matters, there are exceptions to this rule. In certain situations, life insurance protections have limitations, and your policy can be subject to the claims of creditors if you do not take proper preventative measures. To understand how, let’s take a look at the experience of Rob and Katie.
The Wrong Life Insurance Beneficiary
Rob and Katie were the type of couple that shared everything—from preferred ice cream flavor to favorite ‘80s song. Throughout their marriage, they spent nearly every waking moment together, going on long walks together, playing tennis, and visiting the beach. The couple even owned matching tennis outfits, slippers, and pajamas. Naturally, when Rob and Katie set up life insurance policies, they named each other as the beneficiary.
“This way, even if one of us goes first, we’ll always be able to take care of each other,” Katie noted to Rob after they signed their policies.
As Katie and Rob grew older, Rob became very ill. Katie kept to his bedside as often as she could, reading to him and holding his hand every day until hospital visiting hours ended. When she wasn’t watching over Rob, Katie tried to distract herself around the house. She threw herself into remodeling, taking out loans to invest in redoing the bathroom, expanding the bedroom, and buying new furniture. Soon, she had racked up quite a bit of debt.
As Rob grew sicker and his time grew nearer, they both began making arrangements for after his death. It was a difficult time for both of them, but Rob was content—he had lived a good life with a woman he loved, and he could rest peacefully knowing that his wife would be cared for financially. They owned their house, and Katie would receive substantial death benefits from Rob’s valuable life insurance policy. As death benefits, Rob assumed they would be protected from probate and creditors.
In the aftermath of Rob’s death, Katie gave little thought to financials. She was busy managing the funeral and memorial service, and she spared no expense, believing that Rob’s life insurance policy provided her with plenty of cushion.
So it came as a surprise to Katie when creditors began contacting her shortly after she received Rob’s life insurance payout, notifying her that the $100,000 she owed was being attached and levied from the life insurance proceeds to pay off her debt. Katie knew that life insurance payouts were protected from the creditors of the insured in Florida, but she hadn’t realized that this protection does not apply to the creditors of the beneficiary. In other words, though Rob’s life insurance was protected from his creditors, it wasn’t protected from her own.
Katie ended up losing a sizeable chunk of the life insurance payout to creditors, though—mercifully—she still had enough when combined with her own personal savings to live comfortably.
How could Katie’s unfortunate situation have been avoided? One possible way would have been if Rob had named an irrevocable trust as the beneficiary of his life insurance policy instead of his wife. When you name a trust as a beneficiary, the assets inside of the trust are unavailable to creditors. The trust absolutely must be structured properly. By naming a trust as the beneficiary to your life insurance, you keep your hard-earned assets in the hands of the people you care about and out of the hands of creditors.
For more information on protecting your life insurance, reach out to a knowledgeable Florida estate planning attorney. Your attorney can help you assess the current state of your life insurance policy and develop a powerful plan to safeguard your assets from creditors, probate, and the like.
Barry E. Haimo, Esq.
Strategic Planning With Purpose
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