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In Morey v. Everbank, Florida’s First District Court of Appeals held that life insurance proceeds payable to a revocable trust were available to pay the claims of creditors of the settlor’s estate.
Generally, insurance proceeds are exempt from the claims of creditors of the insured. An exception to this rule is when the insurance proceeds are payable to the insured’s estate.
In Morey, the decedent named his revocable trust as the beneficiary of a life insurance policy on his life. Typically, the general rule would have applied to exempt the insurance proceeds payable to his revocable trust from creditors’ claims. However, the revocable trust required the Trustee pay the decedent’s “death obligations” prior to distributing any assets to the beneficiaries of the revocable trust. The decedent died owing substantial obligations. The court found the provisions of the trust to be unambiguous, holding that, although life insurance proceeds are generally exempt from creditor’s claims, Florida law does not require the policy owner to take advantage of the exemption. In other words, the court found that the decedent waived the exemption available for the insurance proceeds under the terms of the trust.
This case offers three important lessons. First, close attention must be paid to “death obligation” clauses so as not to defeat available exemptions. Second, one must monitor and update beneficiary designations on all life insurance policies in order to ensure that the proceeds are paid as the policy-holder truly intends. Had the decedent in Morey named the residuary trusts for his daughters under his revocable trust as beneficiaries under the life insurance policy, the life insurance proceeds would have been exempt from the creditor’s claims. Third, if insurance proceeds are payable to a revocable trust, the terms of the trust should explicitly state that such proceeds are not available to satisfy the debts of the decedent. Failing to take these important steps can defeat a valuable statutory exemption from creditors and the settlor’s wishes.