The First District Court of Appeal of the State of Florida issued an opinion in Morey v. Everbank, holding that life insurance policies payable to a revocable trust, while usually exempt from creditors, can be subject to creditor's claims if language in the trust waives such exemption.
In the Morey case, the decedent purchased two life insurance policies, in the amount of $250,000 each, payable to his revocable trust upon his death. Morey’s trust contained boilerplate language stating that his "death obligations" would be paid first, before any of his assets were distributed.Therefore, his creditors claimed that, pursuant to the trust language, the life insurance had lost itsexempt status and that his debts had to be satisfied before distribution. The trial court and appellatecourt agreed with the creditors. The Court stated:
"While the mere fact that life insurance proceeds are payable to a trust, rather than directly to a natural person, does not deprive them of their exempt status, section 733.808(1), Florida Statutes (2008), makes it clear that life insurance proceeds payable to a trust "shall be held and disposed of by the trustee in accordance with the terms of the trust as they appear in writing on the date of the death of the insured."
Morey created sub-trusts for his daughters inside the overall trust. If he had made the policies payable to his daughter's sub-trusts, and the general claims payment language had not applied to sub-trusts, the creditors would probably not have prevailed in reaching the life insurance proceeds.
When creating a revocable trust that will receive life insurance policies, if the grantor expects the policies to retain their exempt status, one should modify the claims language to avoid this result.And, of course, use competent attorneys who practice in this area of law. This ruling should serve as a warning when designating a revocable trust as beneficiary of life insurance policies.