Focus, Government, and Law

Trust Code gains more certainty

February 28, 2014
Print
Text Size:
A A

Two bills signed by Gov. Rick Snyder last month amend the Michigan Trust Code and the Insurance Code, clearing up any lingering uncertainty about who is eligible to receive death benefits from insurance trusts.

When the Michigan Trust Code was enacted in 2010, it was the first comprehensive statute governing the law of trusts, including how they are created, administered, modified, terminated, etc.

“Up until that time, trusts were governed, basically, by a body of common law that had been developed by the courts over the centuries to determine what the rules were for those kinds of things,” said Mark Harder, Warner Norcross attorney and chair of the committee that drafted the code.

Life insurance policies are often purchased by a trust as a way to provide liquidity and avoid estate tax.

“The insurance trusts provided liquidity to the estate at a time when liquidity was important to either pay estate taxes or maybe help equalize distributions among different family members of a family that owns a business,” Harder said.

“One of the requirements that has always existed in the law for a life insurance policy — whoever owns the policy has to have what is called an insurable interest,” he said. “The idea of an insurable interest is that the person who is buying the insurance has to have some stake in the continuation of the life of the insured.”

A 2005 case from the U.S. District Court in Virginia regarding Maryland law called that assumption into question.

“There was a fight going on between a trustee of an insurance trust and the insurance company over the paying of the death benefit,” Harder explained. “The insurance company fought back on two grounds: that the insurance trust had misrepresented the health of the insured, and … the trust didn’t have an insurable interest.”

The court agreed with the insurance company, invalidating the policy on both of those grounds.

Harder said although the federal appeals court later reversed the decision, it had created a great deal of uncertainty regarding who has insurable interest in an insurance trust.

In response, at least a dozen states have passed legislation to clear up the matter.

“We’ve now got some certainty about when a life insurance trust can buy a life insurance policy and be certain that they have an insurable interest in the life of the insured under the policy,” Harder said.

Recent Articles by Charlsie Dewey

Editor's Picks

Comments powered by Disqus