Life Insurance Proceeds Payable to Estate Are Subject to Creditor Claims

Tax, Business, and Estate Planning Update

Life Insurance Proceeds Payable to Estate Are Subject to Creditor Claims

Life insurance proceeds paid to the insured policy owner’s estate at death are not exempt from the claims of the creditors of the estate. This is the construction given to A.R.S. §20-1131 by the Arizona Court of Appeals, Division 1, in In re Estate of Gottier, 1 CA-CV 19-0797, 2020 WL 5640405, at *1 (Ariz. App. 1st Div. Sept. 22, 2020).

In Gottier, the insured allegedly killed his wife and child and then, an hour later, killed himself. The insured had named his wife and child as the beneficiaries of his life insurance policy. Because they were not alive at the time of the insured’s death, the policy, by its terms, was payable to the insured’s estate. The wife’s parents filed claims against the insured’s estate for the deaths of their daughter and grandchild. They also filed a wrongful death claim. The insured’s estate claimed that the life insurance proceeds were exempt from the claims of the insured’s creditors.

The court held that life insurance proceeds are not exempt from the claims of the policy owner’s creditors unless the proceeds are paid to a named beneficiary or third person who is not the policy owner or the policy owner’s legal representative. The policy owner’s estate does not qualify as a “third person”.

This holding does not affect prior cases. For example, an insured policy owner can still name his or her spouse as the beneficiary of a life insurance policy and the proceeds will not be subject to the insured’s creditors. See, May v. Ellis, 208 Ariz. 299 (2004) (holding proceeds paid directly to a surviving spouse are not subject to the claims of creditors).

Similarly, life insurance owned and made payable to a trust for the benefit of third persons should still not be subject to the creditors of the estate of the person “effecting” the insurance, even if that person, the insured, and the trustee of the trust are the same person. See, In re Estate of King, 228 Ariz. 565 (2012) (holding life insurance proceeds paid to a trust created by the insured in which the beneficiary is a third party are protected from the creditors of the insured’s estate).

The court did not address whether or how the slayer statute (A.R.S. §14-2803) may apply.