Life insurance policies are valuable estate planning tools when used strategically. In this article, you will discover whether naming a Florida revocable trust as the beneficiary of life insurance is a good idea.
Life Insurance Trusts in Florida – Understanding the Concept
When someone dies owning a life insurance policy, the proceeds paid by the insurance companies may provide a reliable source of funds to protect the decedent’s estate from liquidation.
Heirs and beneficiaries can use the money obtained in the life insurance payout to cover taxes, funeral costs, probate fees, and other similar expenses. Depending on the case, the proceedings may save the family’s property from judgments, liens, or even foreclosure.
For example, if the personal representative can pay the decedent’s unsettled debts using the policy proceeds, he or she will not need to execute part of the decedent’s estate to obtain the amount needed.
While it is a useful strategy, many people want to preserve the proceeds obtained in life insurance from creditors’ claims and tax liability. For that reason, it is not unusual to find Florida residents who create life insurance trusts.
Life insurance trusts have three parties involved – the trustor (the insured individual creating the trust), a trustee (fiduciary), and a beneficiary. The trustee holds nominal ownership of the property held in trust on the trustor’s behalf to protect the beneficiary’s interests.
In such cases, the trust itself is designated as the beneficiary of the life insurance proceeds after the trustor’s death. Once the trustor dies, the policy proceeds are paid to the trust and managed by the trustee according to the provisions in the trust instrument.
Naming Revocable Trust as Beneficiary of Life Insurance in Florida – It is a Good Idea?
There are two types of life insurance trusts – revocable trusts and irrevocable trusts. If a trust is revocable, the trustor can modify, amend, or even revoke the trust while he or she is still alive.
In most cases, the best approach is to designate a Florida irrevocable trust as the beneficiary of a life insurance policy. Once an asset is transferred to an irrevocable trust, it is no longer part of the trustor’s estate.
Naming a revocable trust as the beneficiary of a life insurance policy could result in ownership incidents.
Florida Statutes §222.13 (1) specifies that “whenever any person residing in the state shall die leaving insurance on his or her life, (…) 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.”
If the revocable trust instrument has a provision instructing the trustee to pay all decedent’s debts and estate expenses from the policy proceeds before distributing the amount, it may expose the amount to creditors’ claims and administration fees.
Florida case law shows different cases in which specific language in a life insurance revocable trust instrument actually waived the statutory exemption that protects life insurance from probate claims.