Morey v. Everbank: three drafting tips to avoid a troubling decision.
In the Morey decision, life insurance proceeds--which are generally exempt under Florida law from claims by the insured's creditors--were paid to the insured's revocable trust that contained a clause directing that all of the insured's debts were to be satisfied with trust assets. In its decision, the First DCA held that such a clause acted to negate the statutory creditor protection and, as a result, the insurance proceeds were available for the payment of the insured's claims. This article dissects the opinion, presents a conflicting decision, discusses which view is correct, and ultimately, discusses simple yet creative drafting techniques that will avoid the issue altogether.
The Morey decision involves the appeal of a decision from the circuit court for Clay County, in which the court determined that particular life insurance proceeds payable upon the decedent's death, which in certain circumstances under Florida law are exempt from the claims of the decedent's creditors, were, in this instance, not so exempt.
The pertinent facts (as to this article) follow. Carlton W. Morey, Jr., executed a self-settled declaration of trust on January 19, 2000, which provided that the trustees were to pay all expenses of Mr. Morey's last illness and funeral, expenses of administering Mr. Morey's estate, all of his enforceable debts (excluding those secured by life insurance or real or personal property), and all estate and other taxes (payment provisions). The following month, Mr. Morey applied to Nationwide Life Insurance Company for two life insurance policies, each with a death benefit in the amount of $250,000. The application named the "Carl W. Morey Trust" as the beneficiary. On October 1, 2004, Mr. Morey amended and restated the declaration of trust to provide that the residue was to be held in a further trust to be called the "Morey Family Trust." Mr. Morey did not, however, execute a corresponding amendment to the beneficiary designation for the insurance, so upon Mr. Morey's death, the insurance proceeds were paid to the trustees of the declaration of trust, not to the trustees of the Morey Family Trust. Because the payment provisions provided that trust assets were to be used for the payment of all of the decedent's debts and expenses, Mr. Morey's brother, who was the successor trustee of the declaration of trust, filed a petition requesting a ruling confirming that the proceeds payable to the declaration of trust (1) were exempt from all "death obligations" and unavailable to Mr. Morey's estate or its creditors. The circuit court held that the payment provisions superseded any applicable statutory protection and, therefore, the proceeds were available for the payment
of Mr. Morey's debts and expenses. The trustee appealed.
The trustee relied on F.S. [section]222.13(1), which provides, in pertinent part, as follows:
(1) 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 statute states that the proceeds must be paid to a "person." To define "person" in this context, the First DCA cited an additional provision under Florida law, namely, F.S. [section]733.808(1), which provides, in pertinent part, as follows:
(1) Death benefits of any kind, including, but not limited to, proceeds of:
(a) An individual life insurance policy ... may be made payable to the trustee under a trust agreement or declaration of trust in existence at the time of the death of the insured.... It shall not be necessary to the validity of the trust agreement or declaration of trust, whether revocable or irrevocable, that it have a trust corpus other than the right of the trustee to receive death benefits. (2)
The First DCA concluded that the combination of F.S. [section]222.13(1) and F.S. [section]733.808(1) clarifies that the mere fact that life insurance proceeds are payable to a trust, rather than directly to a natural person, does not deprive such proceeds of their exempt status. (3) The First DCA explained, however, that although F.S. [section]733.808(1) authorizes the payment of insurance proceeds to a trust, the creditor exemption in F.S. [section]222.13(1) does not require the policy's owner to take advantage of the exemption, as the second sentence of F.S. [section]222.13(1) (estate payment exception) would dictate otherwise:
Notwithstanding the foregoing, whenever the insurance, by designation or otherwise, is payable to the insured or to the insured's estate or to his or her executors, administrators, or assigns, the insurance proceeds shall become a part of the insured's estate for all purposes and shall be administered by the personal representative of the estate of the insured in accordance with the probate laws of the state in like manner as other assets of the insured's estate.
In other words, the First DCA stated that the insurance policy is a contract, and as such, the freedom to contract is not restricted by the statutory exemption of F.S. [section]222.13(1). Therefore, the above-cited provisions of F.S. [section]222.13(1), which purport to render life insurance policy proceeds unavailable to satisfy estate obligations, can be waived by naming the insured's estate as a beneficiary of the policy or by naming a trust as the beneficiary whose terms direct distribution of the trust assets to the personal representative if the personal representative so requests. (4) As a result of this analysis, the First DCA agreed with the circuit court and affirmed the circuit court's conclusion that the payment provisions superseded the creditor exemption of F.S. [section]222.13(1). Thus, the proceeds were available for the payment of Mr. Morey's creditors.
What About F.S. [section]733.808(4)? Isn't This Right on Point? Did the Court Blow It?
The First DCA focused its efforts on F.S. [section]222.13(1), but it never referenced F.S. [section]733.808(4), which provides that death benefits payable to a revocable trust (which the First DCA referenced in its discussion of F.S. [section]733.808(1)) are exempt from the decedent's obligations and administration expenses. Was this an oversight? Perhaps. Would this have changed the decision? Probably not. It is unlikely that such an oversight would have changed the decision because the same analysis would seem to apply in that the exemption afforded under F.S. [section]733.808(4) does not appear to be absolute, and, thus, could be superseded by a waiver.
Has Any Other Jurisdiction Faced This Issue?
The Morey decision is not the only judicial opinion deciding the potential loss of creditor protection with respect to the payment of insurance proceeds to a revocable trust. A recent Arizona opinion held that such a payment provision does not taint the exception.
In re Estate of King, 269 P.3d 1189 (Ariz. 1st Ct. App. 2012), involved the interpretation of Ariz. Rev. Stat. Ann. [section]20-1131(A), which is a statute very similar to those cited above. Kathryn King named her revocable trust to be the owner and beneficiary of a life insurance policy. The sole beneficiary of the revocable trust was her minor son. Creditors argued that because the revocable trust was responsible for the decedent's debts, any exemption attached to the insurance proceeds was lost because the proceeds were payable to the revocable trust.
While the trial court agreed with this analysis, the Arizona appellate court rejected this conclusion. The Arizona appellate court stated that, although the language in the revocable trust generically provided that the trust should pay unpaid debts of the estate, neither the revocable trust nor Mrs. King's will specifically mentioned the use of the life insurance policies as a source of payment of debts. (5) Further, the revocable trust had other assets from which to pay the debts of Mrs. King's estate. The Arizona appellate court stressed that even though other such assets were essentially worthless as of the date of the decedent's death, this was insufficient to infer that Mrs. King intended to waive any statutory protections and preclude her minor son from receiving the benefit of the life insurance proceeds. (6) Focusing on the explicitness of the waiver requirement, the Arizona Appellate Court concluded that any such waiver must be in clear, effective language, and any direction to include life insurance proceeds as part of the source of funds available for the payment of debts must be explicit. Thus, a general directive to pay the debts from the estate, without mention of the life insurance proceeds, did not waive the Arizona statutory exemption. (7)
Given the King Analysis, Did the First DCA Reach the Correct Result?
With the King decision, there are seemingly two judicial conclusions reached on this issue that are polar opposites--Florida's Morey opinion, holding that expense satisfaction language in a trust voids the exemption, and Arizona's King opinion, stating that a general payment provision is not sufficient to remove the exemption. The question then becomes whether the First DCA reached the correct result with respect to the general waiver--in other words, under Florida law, how important is the specificity of the waiver as to the particular exemption or right waived.
To begin this analysis, the first question is whether any waiver of a particular statutory provision must be specific in reference to the waiver. The general rule in Florida is that absent a specific waiver provision, the statutory exemption may be waivable unless specifically provided otherwise. An example of this approach is found in the Florida Trust Code, in which F.S. [section]736.0105 provides that only 23 provisions contained therein are mandatory, and the rest may be overridden within the trust agreement. No reference is made to the specificity of the particular waiver, thus, such waivers may be general.
In terms of general waivers, even before the Morey decision, other areas of Florida law appear to consistently determine that general waivers are sufficient to waive specific rights. In Hulsh v. Hulsh, 431 So. 2d 658 (Fla. 3d DCA 1983), rehearing den., 440 So. 2d 352 (Fla. 1983), which involved an antenuptial agreement, the Florida Third District Court of Appeal acknowledged that a general waiver of "all rights"
includes the waiver of specific rights without reference to such specific rights. In its opinion, the Third DCA cited to then F.S. [section]731.005(1) (currently F.S. [section]732.702(1)), which stated:
Unless it provides to the contrary, a waiver of "all rights," or equivalent language, in the property or estate of a present or prospective spouse, or a complete property settlement entered into after, or in anticipation of, separation, dissolution of marriage, or divorce, is a waiver of all rights to elective share, homestead property, exempt property, and family allowance by each spouse in the property of the other and a renunciation by each of all benefits that would otherwise pass to either from the other by intestate succession or by the provisions of any will executed before the waiver or property settlement. (8)
Florida courts have also extended this logic toward general waivers to include rights that were not yet in existence when the waiver was executed. In De Garcia's Estate v. Garcia, 399 So. 2d 486 (Fla. 3d DCA 1981), rehearing den., 402 So. 2d 1103 (Fla. 1981), which is another case involving an antenuptial agreement, the court held that a general waiver of "all rights" contained in a prenuptial agreement signed in 1956 waived homestead and elective share rights that were not yet statutorily in existence until 1976. The Third DCA stated that while it is generally true that a waiver is the intentional relinquishment of known rights, the fact that a waiver of rights in an antenuptial agreement does not contain a statutory disclosure requirement persuaded the court to conclude that such a waiver also includes the waiver of unknown rights. (9) The inference from this conclusion is that unless specificity is required in the statute, a general waiver can be extremely broad in its scope.
Thus, the trend in Florida (or, at least in the Third DCA) is that general waivers are acceptable and broad reaching, which infers that the First DCA reached the correct decision. The moral of the Morey decision is that drafting counsel must consider the effect that innocuous and seemingly boilerplate provisions (i.e., "pay all of the debts and administration expenses from the trust") could have on the ultimate trust disposition. However, given the potential reach of the Morey decision, drafting counsel should not wait for a Florida Supreme Court or legislative reversal; rather, such counsel should draft the planning documents to avoid the issue altogether.
Drafting to Overcome the Morey Result
The facts in the Morey decision infer that either the client or the attorney desired to simplify the estate plan by having the proceeds payable to the revocable trust instead of directly to the beneficiaries or using an irrevocable life insurance trust to own the policy. Notwithstanding the short-sighted simplification concerns, the Morey decision should be a lesson to any estate planning attorney in that sometimes the simple solution does more harm than good.
The interesting aspect about the Morey decision is that the issue could have been avoided with simple and thoughtful drafting. The most obvious solution is to draft an irrevocable trust that would prohibit the payments of the settlor's expenses and debts and subsequently transfer the insurance policy into the insurance trust. The client may, however, have reasons why he or she wishes to retain ownership over the life insurance, such as the ability to borrow against the cash surrender value without having to request funds from a trustee.
In this age of creditor protection, in those jurisdictions that provide for an exemption for insurance proceeds, it is important not only to maintain the creditor protection nature of the insurance proceeds but also to maintain that protection for the beneficiaries who survive the settlor. The easiest way to do this is to provide that such proceeds will be held in trust for the beneficiaries. The following examples illustrate ways to accomplish this while not disturbing said statutory exemption. Any may be used depending on the preference of the draftsperson.
Solution #1: Exclude the Insurance Proceeds from the Pool of Funds for Expenses
If for any reason the client wants the simplest of designations for the insurance proceeds, i.e., to provide that the proceeds are to be disposed of under the revocable trust, the simplest, and perhaps easiest, solution is to add an exclusionary provision in the general expense payment clause to exclude the insurance proceeds. The provision could refer specifically to insurance proceeds but could also be general as to exclude any exempt trust proceeds. An example of this provision is the following:
The Trustees shall pay directly or pay to the Personal Representatives of the Settlor's estate (subject to any provisions contained in the Settlor's Will), such sums out of the portion of the principal of the trust that is not exempt under Florida law from any claims of the Settlor's creditors, as are required for the payment of the Settlor's enforceable debts, funeral and administration expenses, and the estate and inheritance taxes imposed upon the Settlor's estate.... Notwithstanding anything contained herein to the contrary, the Settlor specifically does not waive any protection afforded by any statute pursuant to the laws of the State of Florida which would cause any asset disposed of under this Agreement to be exempt from the payment of any obligations under this paragraph.
Solution #2: Pay to Resulting Trust
Solution number one is perhaps the easiest drafting solution with respect to protecting the exemption afforded to insurance proceeds. However, some practitioners may wish to avoid combining insurance with other assets since, despite the safety language referenced above, mixing protected assets with nonprotected assets may not be advisable. Doing so may raise a potential marital-style "commingling" argument or the trustee may inadvertently pay a creditor with insurance proceeds, thus, causing another creditor to assert the proceeds are tainted.
For example, suppose that the insured has three children and that the residuary clause in the revocable trust provides that, "the balance is to be divided into shares, per stirpes, for the Settlor's descendants as survive the Settlor, and each such share shall be disposed of as provided in Article 4 of this Trust," under which Article 4 contains lifetime trusts for the descendants. The beneficiary designation for the insurance policy would be drafted to read as follows:
The Primary Beneficiary of the policy shall be as follows: The proceeds subject to this designation shall be divided into shares, per stirpes, for such of my descendants as survive me, and each share shall be disposed of as provided in Article 4 of my [name of trust], to be added to and disposed of as a part thereof.
The effect of this designation is that under the revocable trust, the share of the balance of the trust assets (after the payment of all of the decedent's debts, expenses, and taxes) for a particular child (residuary share) is disposed of and held in further trust under Article 4. So as to consolidate and combine the residuary share with such child's share of the insurance proceeds, the preamble to Article 4 should recite language similar to the following: "All shares or portions for a particular descendant of the Settlor (the Primary Beneficiary) directed to be disposed of as provided in this Article 4, whether under this Declaration or other than under this Declaration, shall be combined and held by the Trustees in a single separate trust as follows...."
The effect of the "whether under this" clause ensures that the trustee or any third party reading the document is aware that the settlor intends that assets both under the declaration and other than under the declaration are to be disposed of under Article 4 for a particular beneficiary. The only caveat to the drafter is that should the revocable trust be amended in the future so as to change the article containing the trust provisions for the descendants, the insurance beneficiary designation must likewise be changed.
Solution #3: Pour-over Paragraph
Another solution is a derivative of solution two but avoids having to provide for a division among the descendants in the actual beneficiary designation. The problem in the Morey decision is that the proceeds were paid to a trust that provided for the payment of the decedent's expenses and debts. What is needed is a way to provide for a general disposition to the revocable trust without subjecting the insurance proceeds to the pool of assets from which the decedent's expenses and debts are paid.
Query whether providing that the insurance proceeds are to be disposed of as part of the trust residue is sufficient. In most instances, this will still subject the proceeds to the decedent's debts and expenses. For example, most revocable trusts will contain an expense clause similar to the following:
The Trustees shall pay directly or pay to the Personal Representatives of the Settlor's estate (subject to any provisions contained in the Settlor's Will), such sums out of the principal of the trust as are required for the payment of the Settlor's enforceable debts, funeral and administration expenses, and the estate and inheritance taxes imposed upon the Settlor's estate....
The goal is to provide for a general direction for the insurance proceeds to be disposed of in the revocable trust but have such proceeds avoid the disposition of the trust's general trust assets. The solution is to provide that the net residue (i.e., the balance after the payment of all debts, expenses, and taxes) is to be disposed of pursuant to a "pot" provision in the trust into which the insurance proceeds will be paid. The pot provision will then divide the assets into shares for the descendants and direct the disposition to the resulting trusts. For example, suppose that [section]2.5 of the particular revocable trust is the residuary clause, and provides as follows:
2.5 Balance of Aggregate Principal. The balance of the Aggregate Principal shall be divided into shares, per stirpes, for such of the Settlor's children as survive the Settlor and for the descendants who survive the Settlor of such of them as predecease the Settlor, and each share shall be disposed of as provided in Article 4 of this Declaration.
To pass the insurance proceeds as part of the trust funds but have them retain their exempt status, the settlor should provide that the residue is disposed of pursuant to [section]2.6, and then provide for the division among the descendants in new [section]2.6 as follows:
2.5 Balance of Aggregate Principal. The balance of the Aggregate Principal shall be disposed of as provided in Section 2.6 of this Declaration.
2.6 Disposition of Property. All property directed to be disposed of as provided in this Section 2.6, whether under this Declaration or other than under this Declaration, shall be divided into shares, per stirpes, for such of the Settlor's children....
The insurance beneficiary designation is then changed to the following: "The Primary Beneficiary of the policy shall be as follows: The proceeds shall be disposed of as provided in Section 2.6 of my [name of trust]."
As with solution two, the only caveat to the drafter is that should the revocable trust be amended in the future so as to change the section containing the division of property among the descendants, the insurance beneficiary designation must likewise be changed.
Is Legislative Change on the Horizon? Or Even Necessary?
The question facing Florida practitioners is whether there should be a statutory amendment to overrule the Morey decision. As of the publication of this article, The Florida Bar's Real Property, Probate and Trust Law Section has formed a committee to investigate whether a statutory "fix" is necessary and, if so, how it should be drafted. Presumably, the primary question facing the committee is whether a fix is even necessary. Consider that the general consensus among Florida's estate planning practitioners is that a revocable trust is effectively a "will substitute." If so, then shouldn't the estate payment exception apply to revocable trusts as well as estates? Is the current distinction--proceeds payable to an estate lose protection but proceeds payable to a revocable trust do not lose protection--a proper distinction? If not, then the waiver issue in Morey should not have become an issue because the proceeds were paid to the source of funds used to pay the settlor's debts and expenses and, thus, as with an estate, should not have been creditor protected. Further, if it is decided that a "fix" is necessary, how should the fix be drafted--should the estate payment exception be stricken from F.S. [section]222.13(1)? Should language be added to F.S. [section]222.13(1) to provide that, as to a trust, such creditor protection may be waived only by a specific waiver, possibly requiring a statutory reference? There are no easy answers to this dilemma, which means that for now, it is the practitioner's responsibility to prevent the issue by careful drafting.
The ramifications of the Morey
decision as to removing the statutory creditor protection from certain insurance proceeds can, and should, cause drafting attorneys to carefully consider the effects of all provisions of the testamentary documents--even those considered "innocuous" or "boilerplate." Such problems can be caused by drafting shortcuts or the failure of either the drafting attorney or the client to consider the ramifications of certain designations and testamentary provisions. Through some simple and effective drafting techniques, the effect of the Morey decision in clients' estate plans can be avoided.
(1) Note that another part of the Morey decision was a purported reformation of the trust to adhere to Mr. Morey's purported intent that the proceeds be exempt.
(2) Note that the First DCA could also have defined "person" to include a "trust" by citing Fla. Stat. [section]1.01(3), which provides, "The word 'person' includes individuals, children, firms, associations, joint adventures, partnerships, estates, trusts, business trusts, syndicates, fiduciaries, corporations, and all other groups or combinations."
(3) Morey, 93 So. 3d at 485-6.
(4) See generally id. at 486 and 487.
(5) King, 269 P.3d at 1195.
(8) Hulsh, 431 So. 2d at 662.
(9) See generally Garcia, 399 So. 2d at 489.
George D. Karibjanian is a senior counsel in the Boca Raton office of Proskauer Rose, LLP, and is board certified by The Florida Bar in wills, trusts, and estates. He earned his B.B.A. in accountancy from the University of Notre Dame in 1984, his J.D. from the Villanova University School of Law in 1987, and his LL.M. in taxation from the University of Florida in 1988.
This article is based on George D. Karibjanian, Morey v. Everbank: Florida's Problem May Become Your Problem But Is a Problem That Should Never Become a Problem!, 40 Estate Planning J. (March 2013), which discussed the effect of the Morey decision on a national level.
This column is submitted on behalf of the Real Property, Probate and Trust Section, Margaret Ann Rolando, chair, and Kristen Lynch and David Brittain, editors.
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|Title Annotation:||life insurance proceeds paid to revocable trust; Florida|
|Author:||Karibjanian, George D.|
|Publication:||Florida Bar Journal|
|Date:||Jul 1, 2013|
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