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Dana Law Firm recently co-counseled with the law firm of Fennemore Craig on a case before the Arizona Court of Appeals related to insurance proceeds that are payable to the revocable trust.  The creator of the trust was a single mother who took out a $2 million life insurance policy to provide for her child in the event anything happened to her.  Rather than naming the child as the sole beneficiary of the life insurance policy, she made her trust the beneficiary, and her child the sole beneficiary of the trust.

The mother passed away in late 2008, at the height of the economic downturn, and was heavily invested in real estate at the time.  As a result, her debts when she passed away totaled approximately $4 million, which exceeded her assets.   Her creditors decided to go after the life insurance policy proceeds to satisfy the debts.  At the time of the mother’s passing, her child was only six years old.

Dana Law Firm represented the Trustee of this Trust.  The role of the Trustee was to act in the best interests of the Trust.  The main purpose of this Trust was to provide for the deceased mother’s child.

Under Arizona law, it was not disputed that life insurance proceeds paid to an individual are not subject to the claims against the estate of the insured person.  The claimants against the Estate in this case argued that the proceeds payable to the Trust of the deceased person should be available to satisfy the approx. $4 million of claims against her Estate.  The judicial officer of the Superior Court granted judgment in favor of the claimants against the Estate.  If this result were to stand, then the claims against the Estate would consume the child’s entire inheritance.  A child already left without a mother at such a young age would be at a financial disadvantage despite the planning that his mother put in place to prevent that.

The Trustee appealed the ruling to the Arizona Court of Appeals.  The Court of Appeals considered two questions of “first impression”:  (1) “whether A.R.S. 20-1131 protects life insurance proceeds from the insured’s creditors when the proceeds are paid to a trust whose beneficiary is a 3rd party,” and (2) “if the statute does protect the proceeds, whether the language of the trust documents waives such protection when that language generically provides that the trust should pay the unpaid debts of the estate.” Estate of Kathryn L. King, CA-CV 09-0776.

On both points, the Court of Appeals overturned the lower court’s ruling, and entered an opinion in favor of the Trust and its minor beneficiary.  The Court of Appeals concluded that life insurance is protected, and further that the protection of life insurance is not waived unless there is a specific reference to such waiver.

The result of the decision entered by the Court of Appeals is that the minor child will receive the insurance policy.  While his mother will not be there to watch him grow up, graduate from high school, then college, maybe get married and have children of his own, her wish to provide for him in the only way she can after her death will be honored.  And maybe, her son’s receipt of the insurance policy proceeds will make his loss just a little easier to bear.