Are life insurance proceeds protected from creditors?

This question came up during a conversation with a colleague today, and the answer is one commonly heard from attorneys:  “It depends.”

California’s Code of Civil Procedure, section 704.100(c) says:

“(c) Benefits from matured life insurance policies (including endowment and annuity policies) are exempt to the extent reasonably necessary for the support of the judgment debtor and the spouse anddependents of the judgment debtor.”

Thus, it’s up to a judge to decide what “reasonably necessary for…support” means, and this is decided only after a creditor obtains a judgment and then attempts to enforce it–the debtor must then assert his or her claim that the life insurance proceeds are exempt under this statute.

It’s further complicated by other factors, such as whether creditors can even obtain a judgment–creditors in most cases have only one year from the date of someone’s death to obtain a judgment against their estate, under California Code of Civil Procedure 366.2, and this usually must be done through the probate claims process, which has its own set of deadlines.  And, it’s possible the insurance proceeds would be a surviving spouse’s separate property and beyond the reach of the deceased spouse’s creditors.

Trustees, executors, administrators and surviving spouses finding themselves pursued by creditors should always check with experienced probate litigation attorneys to know their rights and responsibilities, as well as their responsibilities to beneficiaries of the deceased’s assets, trust or probate estate. 

The Hidden Etiquette Surrounding Inheritance

Rules of etiquette are followed in many areas of our lives to avoid disputes and to provide a guide on how to do things in a generally accepted manner, or that follows custom. Proper etiquette also infers exhibiting respect or deference where appropriate in certain situations. When it comes to inheritance, there are rules of etiquette to follow especially where the intent of the decedent is not clear regarding disposition of certain assets or property. If you are unclear about disposition or the probate process, consult an inheritance attorney in Pasadena.

Starting the Conversation

At some point, you should talk with your parent or relative regarding their wishes on disposition of their property. If they pass without a Will, then the laws of intestate succession will apply regarding disposition and their intent will be irrelevant. Begin by making a list of the property and ask your relative to whom they wish to leave these items, such as furniture, jewelry, car, bank account funds, collections or other items.

When your list is complete, consider talking to the heirs about what is to be left them and if they want to have those items. If your relative cannot decide, then schedule a family meeting on disposition to avoid disputes and recriminations. Some experts suggest drawing straws if the heirs cannot agree.

Not all heirs or beneficiaries are thrilled to receive what is devised to them while others are resentful of what others did receive. By letting everyone know what they inherited, you can begin the process of determining if they really want the item, wish to give it to another family member or if a swap is in order. If your relative is still living, then let them know that an heir is not interested in the property. Usually, your relative will be grateful to know so he or she can leave it to someone who will appreciate the gift.

Asking for an Item

Is it proper etiquette to ask for a certain item? It depends on whether your relative has already decided, but you might ask that you would like to have it if she/he has not already decided. If it is particularly valuable, either as an heirloom or based on its intrinsic value, then you invite animus if you do not discuss your desire for it with other family members.

Balancing Monetary and Sentimental Values

Fairness in the disposition should be the goal. Each family member might want a particular item and there are bound to be conflicts. If there is not enough of the assets to go around, then you might consider an appraisal of the antique furniture, gun collection, classic car, jewelry or paintings that more than one person wants or if there are complaints that someone else is getting more value. If no agreement can be reached, then you might have to sell the items and divide the proceeds equally.

How can I help?

I have 18 years of experience in probate and trusts and would be happy to answer any questions you may have, at (888) 503-7615 or by email.  My offices serve clients in Los Angeles, San Bernardino and Riverside counties with locations in Pasadena, downtown Los Angeles and Chino Hills.