Trustee of a Family Trust appealed ruling from probate court that permitted the proceeds of a life insurance policy paid to the Trust as beneficiary to be reached by creditors of the decedent’s estate. The Trust had been created for the decedent’s minor son, who was the sole beneficiary. The life insurance policy, designated an asset of the Trust, named the Trust as the beneficiary of the policy. At the decedent’s death, the policy paid $2,000,000 into the Trust.
Because the decedent’s estate had insufficient funds to pay her debts, creditors petitioned the probate court to allow claims against the Trust. The Trustee opposed the claims, arguing that the life insurance proceeds were exempt from claims against a decedent’s estate pursuant to A.R.S. § 20-1131(A). The probate court held “that A.R.S. § 20-1131(A) protects insurance proceeds paid to trusts,” but that the Trust had waived the protection. The probate court thus directed that the insurance proceeds be used to pay the estate’s debts. The Trustee appealed.
A.R.S. § 20-1131(A) provides: “If a policy of life insurance is effected by any person on the person’s own life . . . in favor of another person having an insurable interest in the policy, or made payable by . . . 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 creditors argued that A.R.S. § 20-1131(A) did not protect the life insurance proceeds because the decedent was the trustee of the Trust at the time she effected the policy, the Trust was the owner and beneficiary of the policy, and the policy was an asset of the Trust. The Court of Appeals disagreed, noting that the life insurance proceeds were never the decedent’s nor the Trustee’s. The sole beneficiary of the Trust was the decedent’s son. The court held that the statutory language protected life insurance proceeds paid to a trust in which the beneficiary is a third party.
The creditors also argued that because the Trust was a revocable trust, it was liable to creditors pursuant to A.R.S. § 14-10505(A). The Court again disagreed, holding that this statute was inapplicable because the decedent did not direct that the proceeds be used to pay the estate’s debts and did not otherwise clearly and effectively waive the protection of § 20-1131(A). The Court refused to infer a waiver of the statutory protection in this case because (1) there were other potentially valuable assets in the estate and (2) neither the will nor the Trust listed the insurance proceeds in the directive to pay the decedent’s debts.
Judge Kessler authored the opinion; Judges Baker and Thompson concurred.
Posted by: Grace Campbell