California Estate Planning Attorney Blog

Life insurance is used in estate planning for support, education expenses, death taxes, and retirement. The main goal for insurance is to ensure beneficiaries are provided for. Proceeds from life insurance are received by the beneficiaries upon the death of the insured, but sometimes life insurance gets included in the decedent's estate when the proceeds are paid to the executor of the decedent's estate, the decedent at death possessed an incident of ownership in the policy, or there is a transfer of ownership within three years of death.

One type of insurance is the First-to-Die Life Insurance Policy, also known as joint whole life insurance. This is a group insurance policy where benefits are paid to the surviving insured on the death of one of the insured group members. A first-to-die policy can reduce taxes upon the death of the first spouse.

Another type of insurance is the Survivorship Life Insurance Policy, also know as second-to-die. This policy insures two or more people and pays out upon the last death instead of the first one. Because the benefit is not paid until the last insured dies, the life expectancy is greater and the premium lower. Survivorship policies are usually written to insure husband and wife or a parent and child. The premium on a second-to-die policy is based on a joint age.

If a life insurance policy is owned by the insured, he has control of the policy. If the spouse of the insured owns the policy, the insured has indirect control of the policy. If the spouse dies before the insured, the policy might revert to the insured and be included in his/her estate. If the children of the insured owned the policy, the death benefit would be included in the children's estate, not the parent's. The insured has no control over the policy, and if the children are minors it would require appointment of legal guardians before benefits can be paid. The policy might be owned by a revocable trust, where the insured might be in control of the policy and the death proceeds shielded from potential creditors of the insured. Because the insured has an incident of ownership through the revocable trust, the death benefit is includable in the insured's gross estate and could be accessible to the estate's creditors. If the policy is owned by an irrevocable trust, there is no inclusion in the gross estate, and the insured does not regain any control over the policy and cannot revoke the trust.

If an individual is named as beneficiary of a policy, the decedent cannot exert control over the death proceeds. The individual that inherits the death benefits can use the money for any reason.
If an estate is named beneficiary of the policy, the death benefits are includable in the decedent's gross estate and are subject to the e estate's creditors. If the beneficiary is an irrevocable trust, the trustee can distribute or withhold benefits available to the insured's estate, the assets are protected from creditors and the trust's assets can be assigned to professional money managers.

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In the firm's learning center I have already outlined the importance of including all trust assets in an attached schedule to the living trust (here). But what is the legal consequence of not including certain assets in the trust schedule?

First there is no consequence for items that have a document of title, like e.g. a deed for real estate, which states that the property is held in the name of the trust. The trust "owns" the respective property and it will be distributed according to the terms of the trust upon the death of the grantor without probate.

Problems may arise though with property that is not expressly transferred to the living trust. Such an item may be subject to the ordinary probate proceedings which are long and costly.

However if an outside item (an item that is not formally transferred to the living trust) is included in the property schedule there might be another way out of the ordinary probate proceedings. Under some conditions, it may be possible to obtain a court judgment which determines that property held in the decedent's individual name is actually trust property. Under the so called Heggstad Petition (named after a 1993 California case Estate of Heggstad, 16 CA4th 943, 20 CR2d 433), a successor trustee may claim that property was intended to be transferred to the trust. The usual basis for such a petition is that the property was listed in an annex to the trust. If the petition is granted, the court issues an order declaring that the respective property is in fact trust property. The court order then transfers the respective property to the trustee.

The Heggstad Petition avoids a full probate of the assets that were not transferred to the trust by changing their titles and is therefore more cost-efficient. However the best way to avoid probate is to clearly transfer the property to the trust and naming it in the property schedule.

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Generally speaking undue influence is a legal doctrine that involves one person taking advantage of a position of power over another person. The law usually tries to prevent undue influence and therefore often renders legal acts as invalid if made under undue influence.

This is especially important in probate proceedings. Undue Influence is one of the most common grounds to formally contest of a will in court. A good example can be seen in the case of Alfred Glassell's. The case and the according court proceedings has been described by Lou Ann Anderson on http://www.examiner.com. The last will of Alfred Glassell, in which he left large parts of his estate to the Museum of Fine Arts in Houston has been challenged by his daughter, Curry Glassell. She claimed that the museums law firm, Vinson & Elkins used undue influence to convince her father to change his last will in favor of the museum. In the end the will was uphold by the Jury.

This case shows, how complex and risky probate procedures can be. The outcome of a probate procedure can never be predicted hundred percent. Therefore it is usually a good idea to avoid probate procedures at all. The most common tool for this purpose is a living trust. Living trusts are generally harder to challenge under the doctrine of undue influence due to their persistent nature. You'll find a lot of information about living trusts on the firm's website.

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