ONE WAY TO PUT $50,000 IN THE POCKET OF YOUR CLIENTS

December 3, 2010 § 5 Comments

You are representing the executrix who is one of three siblings who are the legatees of the decedent.  They have come to you because their dad’s only asset of any real value, other than his furniture and an old car, was a life insurance policy with a face value of $50,000 that he had made payable to his executor for the estate, and the estate needs to be probated to receive the insurance proceeds.

The catch is that the creditors have claims that exceed the proceeds of the life insurance policy:  $17,000 to various credit cards; $8,000 to a loan company; and $36,000 to doctors and hospitals for the final illness.  Pretty bleak. 

The furniture and car are exempt property, as we know.  Is there anything else you can do?

Look at MCA § 85-3-13.  Here’s what it says:

The proceeds of a life insurance policy not exceeding Fifty Thousand Dollars ($50,000.00) payable to the executor, or administrator, of the insured, shall inure to the heirs or legatees, freed from all liability for the debts of the decedent, except premiums paid on the policy by any one other than the insured, for debts due for expenses of last illness and for burial; but if the life of the deceased be otherwise insured for the benefit of his heirs or legatees at the time of his death, and they shall collect the same, the sum collected shall be deducted from the Fifty Thousand Dollars ($50,000.00) and the excess of the latter only shall be exempt. No fee shall be paid or allowed by the court to the executor or administrator for handling same.

Under this section, the first $50,000 in life insurance proceeds is exempt from the claims of creditors, although that amount would be reduced by the amount of any other life insurance proceeds that the legatees receive from policies on the decedent’s life.  The only exceptions to the exemption would be:  Any claim made for payment of life insurance premiums made on the policy by someone other than the insured; and any claims for the burial and administrator’s or executor’s attorney’s fees for administering the estate, since those are not debts of the decedent, but rather are debts of his estate.  Dobbs v. Chandler, 36 So. 388 (Miss. 1904).  But attorney’s fees incurred in recovering insurance proceeds are not an administrative expense chargeable against the proceeds.  Abernethy v. Savage, 132 So. 553, 554 (Miss. 1931).   

The exemption is not limited to the spouse and children, but inures to the benefit of the heirs or legatees, and must be liberally construed in their favor.  Coates v. Worthy, 17 So. 606; on suggestion of error, 18 So. 916 (Miss. 1895).

The exempt proceeds are divided among the heirs or legatees on a pro rata basis.  Magee v. Bank of Hattiesburg & Trust Co., 98 So. 541 (Miss. 1923). 

The insurance proceeds must be payable to the executor or administrator of the estate.  In Rice v. Smith, 16 So. 417 (Miss. 1894), the court found the proceeds not to be exempt where the insured had named himself, his executors, administrators and assigns as beneficiaries.  Held that the decedent himself was the true beneficiary, and that his administrator held the proceeds just as if the decedent himself had held them.  This is a curious result, since it seems to presuppose that one may somehow collect one’s own life insurance proceeds.  But the significance of this case is that the statute requires the beneficiary to be the executor or administrator.   

Caveat:  MCA § 85-3-11 disallows the exemption where the decedent can be proven to have used life insurance to defraud creditors. 

Note:  The cases cited are ancient, but I believe them to be good law and I found no negative history.               

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