Insurance Trusts Can Be Beneficial for Estate Planning and Also Result in Litigation

New York Estate Planning can involve many different aspects. In most instances, individuals assume that the need to consult an estate planning attorney only arises when a person has significant assets that may result in the imposition of Federal estate taxes or state estate taxes. In fact, even when there is no potential for taxes being imposed at death, the preparation of a Last Will is really a form of estate planning by avoiding the uncertainty of intestate administration.

When tax planning is or may be important, one of the more common planning methods is to use life insurance as a planning device. Life insurance can provide a means by which an estate can increase liquidity and provide funds to pay estate taxes and monetary bequests. A common use of insurance is to create an insurance trust that will own the insurance policy.  The trust will be separate from the decedent’s taxable estate and, therefore, not increase the taxes payable.The creation of an irrevocable life insurance trust formed the basis of a litigation that occurred in the case of American General Life Ins. Co. v. Diana Spira 2005 Irrevocable Life Ins. Trust.  In Spira, Federal District Court Judge Nelson Roman, in a decision dated November 25, 2014, denied motions for summary judgment by both parties. The facts of the case show that during her life Diana Spira had applied for a $5 million life insurance policy. Diana was the insured and an irrevocable life insurance trust that she created was to be the owner and beneficiary of the policy. In the insurance application Diana indicated her annual income and net worth. When Diana died less than two years after the policy was issued, the insurance company refused to pay the claim.  The company asserted that the application contained material misrepresentations regarding Diana’s income and net worth. Since the court found that there were significant questions of fact existing between the parties, it denied the summary judgment motions.

There are a number of important lessons to be learned from Spira.  First, creating an estate plan that considers all possible methods of providing a tax benefit is essential. In this case the creation and funding of an irrevocable life insurance trust, as pointed out by the Court, was to provide insurance on Diana Spira’s life and to have cash liquidity to pay for possible estate taxes and other post-death expenses.  Secondly, it is essential that when creating or implementing estate planning or advance directive documents, care should be taken to make sure that full and accurate information is used. The rather simple task of completing an insurance application in Spira resulted in extensive estate litigation because some of the statements that were made in the application were allegedly untrue.

I have represented many clients in connection with the creation of their estate plans. I have also represented them in Court proceedings regarding issues relating to Contested Wills and assets ownership matters.

New York City estate lawyer, Jules Martin Haas has helped many clients over the past 30 years throughout Manhattan and Queens Counties resolve issues relating to estate planning, administration and settlement in New York Probate and Administration proceedings. If you or someone you know has any questions regarding these matters, please contact me at (212) 355-2575 for an initial consultation.

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