Trust and Will Reformation & Life Insurance Not Always Protected from Creditors

Life insurance death benefit is not always protected from the claims of creditors in Florida probate and trust administration.  

In Morey v. Everbank, (1st DCA 2012) the Florida Court determined that life insurance death benefit was not protected from creditors because the death benefit was payable to a trust with language directing that creditors of the estate be paid.

   

In the case, a large life insurance policy was made payable to a revocable trust.   The decedent, at the time of death, had extensive creditors that pursed the death benefit.  

Florida’s exemption statutes provide, in general, that death benefit is exempt from the claims of creditors.  Section 222.13(1) provides as follows:

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. 

The Florida Probate Code further protects life insurance death benefit proceeds from the claims of creditors by providing that life insurance payable to a trust does not deprive the death benefit of its protected status.  Section 733.808(4) of the Florida Probate Code provides:

Death benefits payable * * * shall not be deemed to be part of the decedent’s estate, and shall not be subject to any obligation to pay the expenses of the administration and the obligations of the decedent’s estate * * * to any greater extent that if the proceeds were payable directly to the beneficiaries named in the trust.  

Section 733.808(1) of the Florida Probate Code, however, provides:

The death benefits 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.  

The Court then read the language of the trust, which provided that the trustee of the trust was required to pay all of the settlor’s debts before making distribution to the beneficiaries of the trust, to determine that the death benefit had to be used to pay the creditors: 

While life insurance proceeds are not payable directly to the estate or subject to obligations of the estate merely by virtue of being directed to a grantor trust, here the clear and explicit terms of the trust make the policy proceeds available to satisfy obligations of the estate, pursuant to section 733.808(1).

As a fallback argument, the trustee argued that the terms of the trust should be modified so as to avoid the harsh result faced by the trust beneficiaries.  According to the Court of Appeals:

Pursuant to section 736.0415, Florida Statues, a court may reform the terms of a trust, even if unambiguous, to conform the terms to the settlor’s intent if it is proved by clear and convincing evidence that both the accomplishment of the settlor’s intent and the terms of the trust were affected by a mistake of fact or law, and may consider evidence relevant to the settlor’s intent even though the evidence contradicts as apparent plain meaning of the trust instrument.  Reformation is available for a mistake in the form of expression or articulation – an error that arises when a donative document includes a terms that misstates the donor’s intention, fails to include a term that was intended to be included, or includes a terms that was not intended to be included. 
The estate in question held illiquid business assets, and there was no way in which the estate could have paid its debts without the insurance proceeds.  The value of the assets, however, deteriorated after the trust was drafted, so much so that the trust’s residuary beneficiaries would receive nothing from the estate.
The trial court did not err in ruling that deterioration in the decedent’s financial circumstances between the time he executed estate planning documents and the date of his death – which in the event resulted in a lack of any residuum with which to fund the Morey Family Trust – did not constitute a mistake requiring reformation of the trust documents. 
Reformation is not available to modify the terms of a trust to effectuate what the settlor would have done differently had the settlor foreseen a change of circumstances that occurred after the instruments were executed.

Pinellas County (Clearwater)

Matthew Weidner

Orange County (Orlando)

Philip W. Gunthert

Broward County (Ft. Lauderdale)

Natasha M. Dalton

Hillsborough County (Tampa)

R. Todd Burbine

Sarasota County

Dawn Bates-Buchanan

Lee County (Ft. Myers)

Scott Kuhn

Duval County (Jacksonville)

Long H. Duong

Complete Guide to Florida Probate

Opening the Probate Estate / Initial Steps
Payment of Creditors, Expenses And Beneficiaries
Florida Spousal and Family Rights
Closing the Probate Estate
Probate Litigation and Will Contests
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Complete Guide to Florida Probate

Opening the Probate Estate - Initial Steps
Payment of Creditors, Expenses And Beneficiaries
Florida Spousal and Family Rights