Morey v. Everbank, — So.3d —-, 2012 WL 3000608 (Fla. 1st DCA July 24, 2012)

1st DCA: “The owner of an insurance policy may waive the section 222.13 exemption [1] merely by designating the insured or one or more of the insured’s creditors as a beneficiary or beneficiaries, [2] by naming the insured’s estate as a beneficiary of the policy or, as here, [3] by naming as beneficiary a trust whose terms direct distribution of the trust assets to the personal representative, if requested.”

Florida has a well earned reputation for being almost ridiculously generous when it comes to creditor protection. Our unlimited homestead protection usually gets most of the attention, but the goodies don’t end there. For example, under F.S. 222.13 Florida residents can leave their heirs unlimited amounts of life insurance money . . .  without a penny going to their creditors. In other words, a Florida resident can die bankrupt, but leave his heirs millions in creditor-exempt life insurance proceeds. This exemption applies regardless of whether the insurance proceeds are paid directly to your heirs or go to them via a revocable trust. See F.S. 733.808(4).

But is it possible to blow this valuable creditor-protection statute? YES! It’s a free country, and if you want to hand otherwise protected funds over to your creditors, no one’s going to stop you. In fact, that’s exactly what happened in this case.

Case Study:

This case involves a multimillion dollar estate . . .  that’s bankrupt. Back in 2000 the decedent purchased life insurance and named his revocable trust as the beneficiary of the insurance proceeds. So far so good. However, for reasons that in retrospect turned out to be mistaken, the decedent’s revocable trust stated that his life insurance proceeds could be used to pay his creditors.

After the decedent’s death in 2008, the trustee of his revocable trust (his brother) asked the court if the life insurance proceeds remained creditor protected. Answer: NO. Why? Because the decedent waived the creditor-protection shield by the terms of his own revocable trust (oops!).

While life insurance proceeds are not payable directly to the estate or subject to obligations of the estate merely by virtue of being directed to a grantor trust, here the clear and explicit terms of the trust make the policy proceeds available to satisfy obligations of the estate, pursuant to section 733.808(1).

. . .

An insurance policy is a contract. The right to select the beneficiary of a life insurance policy is an aspect of the freedom to contract. The statutory exemption does not purport to restrict that freedom. The owner of an insurance policy may waive the section 222.13 exemption [1] merely by designating the insured or one or more of the insured’s creditors as a beneficiary or beneficiaries, [2] by naming the insured’s estate as a beneficiary of the policy or, as here, [3] by naming as beneficiary a trust whose terms direct distribution of the trust assets to the personal representative, if requested.

At my firm we use the Lawgic drafting software for our wills and trusts. When drafting revocable trusts, Lawgic provides the following standard clauses designed to make sure life insurance proceeds paid to a revocable trust don’t lose their creditor-exempt status. If the revocable trust at the heart of this case contained similar clauses, there never would have been a problem.

Standard Insurance Clauses:

Allocation of Death Benefits. If any life insurance proceeds . . . included in my gross estate for federal estate tax purposes become payable to the Trustee, those proceeds are to be allocated between the Marital Trust and the Family Trust according to the formula [contained herein], and to be made available for the payment of expenses of administration and taxes. These proceeds may not be used for payment of claims against my estate. . . .

Excluded Property. If any funds become available to the trustees of any trust, including without limit, life insurance . . . and those funds are not otherwise included in my gross estate for federal estate tax purposes, then none of those funds may be used to pay, directly or indirectly, any debts, taxes, or expenses of mine or my estate.

For more on how simple but effective drafting techniques can be used to ensure none of your clients ever end up in the same mess as the estate in this case, you’ll want to read Morey v. Everbank: Three Drafting Tips to Avoid a Troubling Decision by George D. Karibjanian.

If in hindsight the trust’s waiver language turns out to be a mistake, what about judicially modifying the trust agreement to fix the problem?

It’s safe to assume that back in 2000, when the decedent signed his revocable trust and years before his death in 2008, he didn’t expect to die bankrupt. If he knew then what his trustee knows now, he obviously would have done things differently. Hindsight is 20/20: why not just ask the Court to judicially modify the trust agreement to fix the problem?

This is actually the most interesting question raised by this opinion, and it’s governed by F.S. 736.0415 (which I’ve previously written about here). It’s the type of question lawyers should expect to get asked any time their clients find themselves in a mess caused by drafting we all agree – in hindsight – would have been done differently if the decedent knew then what we know now. Here’s the problem: you don’t get a “do over” if the facts don’t pan out as planned; the types of drafting “mistakes” court’s are authorized to fix are mistakes based on facts existing at the time the document was signed . . .  not years later. Strike two for trustee:

Reviewing the record in the present case, it is clear that a reasonable trier of fact could have been left—as the learned trial judge was—without a firm belief or conviction that the trust terms were contrary to the decedent’s intent at the time he executed the (last amendment to the) trust declaration.FN11

FN11. The time the governing documents were executed is the pertinent point in time. The Restatement provides the following illustration:

3. G’s will devised his government bonds to his daughter, A, and the residue of his estate to a friend. Evidence shows that the bonds are worth only half of what they were worth at the time of execution of the will and that G would probably have left A more had he known that the bonds would depreciate in value.

This evidence does not support a reformation remedy. G’s mistake did not relate to facts that existed when the will was executed.

Restatement (Third) of Prop.: Wills & Other Donative Transfers § 12.1 cmt. h, illus. 3 (2003).

. . .

A reformation relates back to the time the instrument was originally executed [or amended] and simply corrects the document’s language to read as it should have read all along.” Providence Square Ass’n, Inc. v. Biancardi, 507 So.2d 1366, 1371 (Fla.1987).

. . .

The trial court did not err in ruling that deterioration in the decedent’s financial circumstances between the time he executed estate planning documents and the date of his death —which in the event resulted in a lack of any residuum with which to fund the Morey Family Trust—did not constitute a “mistake” requiring reformation of the trust documents. Reformation is not available to modify the terms of a trust to effectuate what the settlor would have done differently had the settlor foreseen a change of circumstances that occurred after the instruments were executed. See, e.g., Restatement (Third) of Prop.: Wills & Other Donative Transfers. at cmt. h (2003) (Reformation is not “available to modify a document in order to give effect to the donor’s post-execution change of mind … or to compensate for other changes in circumstances.”).