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David Toback, Attorney at Law
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Careless Language Can Expose Exempt Assets to Creditors

In the world of estate planning, there’s good planning, no planning, and bad planning. In many cases, the third can lead to assets and property being taken by creditors, instead of being passed to your intended beneficiaries.

Life Insurance Exemptions

Florida provides for certain assets to be exempt from claims of creditors when you pass away. One such asset is, generally, proceeds of a life insurance policy. Florida law often protects widows from having their life insurance benefits being taken by creditors.

But in one case, the estate planning strategy became too fancy. In Morey v. Everbank, a deceased declared that his life insurance proceeds would go into a trust upon distribution. That alone was acceptable, since putting such proceeds into a trust doesn’t get rid of their otherwise exempt status.

The problem came in the additional instructions that he left for the trustee of his trust—specifically, that his life insurance should be used to satisfy any of his creditors. Sure enough, when he passed, his estate petitioned to avoid any payments to creditors, asserting the exemption for life insurance proceeds.

In other words, the issue became whether the legally provided creditor exemption for life insurance proceeds can be overridden or waived by a direct request to use the proceeds to pay creditors.

The court believed that the exemption provisions could be waived, and that the deceased’s desires to pay the creditors from the life insurance was valid and enforceable. According to the court, the life insurance policy is a contract, and if a party wants to contract to pay anyone—even creditors—from the policy, that is their right, which can’t be impeded by the statute.

Avoiding the Mistakes

So why would anyone voluntarily choose to have their life insurance policy proceeds pay creditors before paying their own family or beneficiaries? In some cases, it’s a result of boilerplate language—standard terms that are in every trust or contract (often included in do-it-yourself forms that are sold in stores or online) that nobody bothers to read or change.

Other times, people aren’t aware that creditors may not be able to go after their spouse or children for debt the deceased incurred. Out of incorrect fear of leaving them with the deceased’s own debt, they include language paying creditors off.

Ironically, none of this would have been a problem had the deceased simply done nothing with regard to his life insurance other than perhaps including it in a will. Had he done nothing, it would have gone to whomever he designated in a will, and would have been forever exempt from creditors. There was likely no need for a trust to be set up in the first place.

Simple and common language in estate planning can completely change the meaning of your estate documents. Make sure your estate and your property go where you want. Contact Tampa business and probate attorney David Toback to discuss your needs and make sure there’s nothing in your documents that could cause problems later on.

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