Estate Planning Newsletter – Feburary 2017

ASSET PROTECTION PLANNING THROUGH LIFE INSURANCE

The case of Estate of James Christopher Sprinkle points out an important aspect of asset protection planning and life insurance.  The facts were that Mr. Sprinkle died owning a $250,000.00 life insurance policy insuring his life. His wife was the beneficiary.  The wife collected the life insurance proceeds and bought real property. Her creditors filed suit against her, and then she transferred the real property to her sister-in-law without consideration.  A creditor attempted to set aside the sale as a fraudulent conveyance and recover the money used to buy the property.  The wife defended on the basis that she claimed the life insurance proceeds insuring her husband’s life that were payable to her were exempt from her creditors.  The Court ruled against the wife.

The important take away from the Estate of Sprinkle case is not the result, but the discussion by the Court of Tennessee Statutes providing an exemption from creditors of a decedent for life insurance payable to beneficiaries, even an estate.

The Court discussed TCA §57-7-202 and §56-7-203.  Section 57-7-202 provides that whenever a married person obtains life insurance insuring his life, it is not subject to his debts, but shall inure to the benefit of his surviving spouse and children, as the case may be.  Even life insurance proceeds payable to a testate estate passing under the dispositive provisions of the Will are not subject to debts of the deceased spouse unless specifically charged with the debts in the Will.

Section 56-7-203 provides that the net amount payable under any policy of life insurance upon the life of any person made for the benefit of a spouse or children is exempt from all claims of creditors of the person.

The Court in the Estate of Sprinkle case clarified that the use of the term “person” in Section 56-7-203 refers to the deceased person, meaning the insured upon whose life the policy was based, not the beneficiary.  In effect, life insurance proceeds can be exempt from creditors’ claims of the decedent’s creditors, but not provide an exemption from the beneficiary’s creditors.

MY RECOMMENDATION:   Life insurance is an important tool in estate planning and in asset protection planning.  It is important to understand the relationship of life insurance, beneficiaries of life insurance, creditors of the decedent, and creditors of the beneficiaries.  This situation is especially true when spouses have obligated themselves jointly on debt, such as business debt or residential debt, and the surviving spouse is the beneficiary of life insurance proceeds.

Yours very truly,

RAINEY, KIZER, REVIERE & BELL, P.L.C.

William C. Bell, Jr., Attorney at Law