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Feb 2014
12
February 12, 2014

Lawmakers Strengthen Michigan’s Trust Code to Ensure Death Benefits Can Be Paid to Insurance Trusts


Yesterday, Gov. Rick Snyder signed into law two bills that clarify who is eligible to receive death benefits from insurance trusts.

The bills, which amend the Michigan Trust Code and the Insurance Code, make clear that trustees of insurance trusts have an “insurable interest” when the life insurance policies held by trustees pay death benefits to trusts for the benefit of parents, grandparents, great-grandparents, children, grandchildren, great-grandchildren, aunts, uncles, nieces and nephews of the insured, as well as stepchildren, of the creator of the trust.  Insurable interest refers to the legal requirement that the owner of an insurance policy has an interest in the continuation of the life of the insured.

“This legislation significantly reduces concerns about who has an insurable interest in an insurance trust,” said Mark Harder, a partner at Warner Norcross who chaired the committee that drafted the Michigan Trust Code.  “Life insurance trusts often involve millions of dollars and are frequently used as part of estate plans to protect family businesses and mitigate the effects of estate taxes.

“This should resolve the matter in the vast majority, if not all, situations in which a trustee of an irrevocable life insurance trust owns and is the beneficiary of a life insurance policy.”

The legislation was a reaction to a 2005 federal lawsuit – Chawla ex rel. Giesinger v Transamerica Occidental Life Insurance Co. – that challenged an insurance company’s refusal to pay a death benefit to the trustee of a trust. A U.S. District Court in Virginia had ruled that under Maryland law insurers weren’t required to pay death benefits to a trustee who administered an insurance trust.

That ruling was later reversed by a federal appeals court, but the case caused concern among lawyers, estate planners, trust departments and clients.

“Because of the U.S. District Court’s initial ruling, the fear existed that insurance companies might have refused to pay the death benefit to the trust of the insurance trust, instead simply refunding the premiums after a policy holder died,” Harder said.
 
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About Warner Norcross & Judd

Warner Norcross & Judd is a corporate law firm with 220 attorneys practicing in seven offices throughout Michigan: Grand Rapids, Holland, Lansing, Macomb County, Midland, Muskegon and Southfield. By providing discerning and proactive legal advice, Warner Norcross & Judd forges a better partnership with its clients.

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