June 11, 2006
Maryland Life Insurance Trust Law Update
Esther A. Streete
Maryland Life Insurance Trust Law Update
Last year, the U.S. District Court for the Eastern District of Virginia, applying Maryland Law, held in Chawla v. Transamerica Occidental Life Insurance Company [i] that a trust lacked an insurable interest in the life of the insured, the grantor and lifetime beneficiary of the trust. The court's holding allowed the insurance company to deny payment of the trust's claim to the life insurance proceeds.
On March 7, 2006, the United States Court of Appeals for the Fourth Circuit affirmed in part and vacated in part the holding of the District Court[ii]. The Fourth Circuit affirmed the rescission of the policy on the grounds of misrepresentation but vacated the alternative ruling that the trust lacked an insurable interest because the "alternative ruling appears to have unnecessarily addressed an important and novel question of Maryland law." The Fourth Circuit Court's decision, although favorable, was not a conclusive decision that MD trusts have an insurable interest. Hence, the issue was not fully resolved by the decision.
Prior to the Fourth Circuit Court's decision, Senate Bill 300 was introduced, and it provided for the repeal and reenact, with amendments, of Section 12-201 of the Maryland Code, the insurable interest statute. On June 1, 2006, Governor Ehrlich elected to allow the Bill to become law without his signature, and the reenacted Code Section will provide that
"the trustee of a trust has an insurable interest in the life of an individual insured under a life insurance policy owned by the trust or the trustee of a trust if, on the date on which the policy is issued,
(I) The insured is
1. The grantor of the trust;
2. An individual related closely by blood or law to the grantor; or
3. An individual in whom the grantor otherwise has an insurable interest; and
(II) The life insurance proceeds are primarily for the benefit of trust beneficiaries having an insurable interest in the life of the insured."
The new law applies to all trusts existing before, on, or after June 1, 2006, regardless of the effective date f the governing instrument under which the trust was created, but only as to life insurance policies that are in force and for which the insured is alive on or after June 1, 2006.
Life Insurance Trusts are popular estate planning tools used by estate planning practitioners to keep the proceeds of life insurance from being subject to estate tax in the estate of the insured and/or his or her spouse. These types of trusts have been used for many years, and the District Court's decision adversely impacted their use as a planning tool. Thankfully, the issue has been resolved and life insurance trusts are viable estate planning tools once more. Feel free to call Esther A. Streete at 301-441-2420 ext 209 regarding the formation of life insurance trusts as an estate planning tool.
[i] Chawla v. Transamerica Occidental Life Ins. Co., No. 03-1215 (ED Va. Feb. 3, 2005)
[ii] Chawla v. Transamerica Occidental Life Ins. Co., No. 05-1160 (Fourth Cir., March 7, 2006).
