The Arizona Court of Appeals recently held in the case In Re King, that even though the debts of the decedent were greater than her assets at death, the life insurance proceeds, payable to her trust created prior to her death, were NOT subject to creditor claims. In the King case, the life insurance proceeds were in the amount of $2 million, and at death, the designated proceeds were to be paid into the trust created by the deceased and then paid to the deceased’s sole surviving child. The deceased’s trust did state that the trustee was to pay expenses of the trust but this broad language was not sufficient to waive the protections provided by Arizona law.
Arizona law generally provides that life insurance proceeds paid to a third party after the death of the insured are not subject to creditor claims. ARS 20-1131 (A). However, the King case was the first time an Arizona court reviewed whether the state statute that exempts life insurance proceeds from the deceased creditors also applied to a trust where the proceeds were first paid to trustee of the trust and then paid to the beneficiary. The creditors argued that the statute only applied to third parties and that the trust was not a third party since the trustee of the trust after King died was her personal representative of the deceased’s estate in Arizona. In the King case, the insurance policy was owned by the trust created for King and it was the beneficiary of the life insurance policy proceeds. The court in King ruled the trust was a third party under the statute. The Arizona court, in reaching its decision, reasoned that life insurance proceeds do not come to the deceased person and are never part of his or her estate but come into existence after the death and are then paid to the designated beneficiary via an insurance contract between the insured and the insurance company. Therefore, the creditors of an insolvent estate could recover any of the Arizona life insurance proceeds.