Sometimes into the dull, dusty life of a probate lawyer drops a little nugget of excitement; a gem of an obscure law that has lain unnoticed and uncited for ‘lo these many years. On this rare occasion the lawyer’s eye betrays a gleam of enthusiasm, the brow momentarily unfurls, and the lips briefly curve upward into something that could, in a more human-like creature, be interpreted as a smile.
I proudly present to you today’s nugget: the life insurance and annuity probate debt dodge. The statute, Insurance Code Section 1108.052, has, incredibly, never been cited in an appellate case. That makes it almost impossible to find on the usual research foray.
But what a treasure!
What Is Insurance Code Section 1108.052?
The statute is an extension of an older law that provides, with only few exceptions, life insurance and annuity benefits are paid out free of creditor claims. The benefits cannot be garnished, seized, or appropriated by a creditor of either the insured or the beneficiary. The benefits are protected from bankruptcy. The benefits include the cash value and proceeds of an insurance policy and payments from an annuity.
The exemption exists for both the insured and the designated beneficiary. That means the proceeds are protected from the insured’s creditors and from the beneficiary’s creditors alike.
The sensational part of the newer statute, however, concerns the insured’s probate estate. Suppose you take out a $100,000 life insurance policy on your own life and you do not name a beneficiary. When you die, the policy pays the proceeds to your probate estate. The proceeds become part of the estate assets.
Normally your estate administrator or executor must use the estate assets, including cash, to settle the creditor claims before making distributions to your beneficiaries. This was the law in Texas prior to 2013, when 1108.052 became effective for life insurance and annuity benefits.
Under the newer statute, life insurance and annuity proceeds payable to an estate are treated differently than other types of assets. Life insurance and annuity benefits cannot be used to pay the decedent’s creditors. They are, in legal parlance, exempt from creditor claims. Your life insurance passes through your estate free of your creditor’s claims.
That is incredible. I wonder how many people serving as executors or administrators of an estate realize this law exists? More to the point: how many estate creditors know it exists?
Exceptions to the Debtor Protection
There are three exceptions to the debtor protection.
First, the exemptions do not apply to a premium payment made in fraud of a creditor. If a creditor threatens you with a $100 million judgment and you scheme to protect your money by buying annuities, that will not work.
Second, the exemptions do not apply to any insurance policies you have pledged to secure a loan or other debt. If you borrowed money and signed over your insurance policy as collateral, then you have waived your exemptions as far as that lender is concerned.
And, finally, the exemptions do not apply to protect your life insurance or annuities from a child support lien.
Those 3 are the only exceptions in the Insurance Code. Note, however, that the protections may not extend to claims regarding the decedent’s past-due taxes or to estate administrative expenses.
Nonetheless, the comprehensive debtor protections make life insurance and annuities valuable as probate assets. It may be time to call your life insurance agent or financial advisor and discuss your options.
Said the probate lawyer with a smile.
Hammerle Finley Can Help With Your Probate Needs
Virginia Hammerle is in her fourth decade of practicing law. She is Board Certified in Civil Trial by the Texas Board of Legal Specialization and an Accredited Estate Planner. Contact her at email@example.com or visit www.hammerle.com. This column does not constitute legal advice.