DiFilippo v. Reed (In re Estate of King)

• Decision Date: 07 February 2012
• Docket Number: No. 1 CA–CV 09–0776.,1 CA–CV 09–0776.
• Citation: 627 Ariz. Adv. Rep. 6,269 P.3d 1189,228 Ariz. 565
• Parties: In the Matter of the ESTATE OF Kathryn L. KING, Deceased.John R. DiFilippo, Petitioner/Appellee, v. Miles Elliot Reed, as Personal Representative for the Estate of Kathryn L. King and Trustee for the K.L. King Family Trust, Respondent/Appellant,andRose F. Simpkin, a creditor of the Estate of Kathryn L. King; JPMorgan Chase Bank, N.A., a creditor of the Estate of Kathryn L. King; Colonial Capital, LLC, a creditor of the Estate of Kathryn L. King; Doe Creditors I through X, Appellees.
• Court: Arizona Court of Appeals

228 Ariz. 565

269 P.3d 1189

627 Ariz. Adv. Rep. 6

In the Matter of the ESTATE OF Kathryn L. KING, Deceased.John R. DiFilippo, Petitioner/Appellee,

v.Miles Elliot Reed, as Personal Representative for the Estate of Kathryn L. King and Trustee for the K.L. King Family Trust, Respondent/Appellant,andRose F. Simpkin, a creditor of the Estate of Kathryn L. King; JPMorgan Chase Bank, N.A., a creditor of the Estate of Kathryn L. King; Colonial Capital, LLC, a creditor of the Estate of Kathryn L. King; Doe Creditors I through X, Appellees.

No. 1 CA–CV 09–0776.

Court of Appeals of Arizona, Division 1, Department A.

Feb. 7, 2012.

The Payne Law Office By Christopher D. Payne, Phoenix, Attorneys for Petitioner/Appellee John R. DiFilippo.

The Armstrong Firm By James P. Armstrong, Phoenix, Attorneys for Petitioner/Appellee Nicholas DiFilippo, a minor.

Fennemore Craig, P.C. By Julio M. Zapata, Timothy J. Berg, Theresa Dwyer–Federhar, Scott McDonald, Phoenix, and Dana Law Firm Scottsdale By Matthew S. Dana, Mark E. Andersen, Scottsdale, Attorneys for Respondent/Appellant Miles Elliot Reed.James E. Brown, P.C. By James E. Brown, Phoenix, Attorneys for Creditor/Appellee Rose F. Simpkin.Poli & Ball, P.L.C. By Jeffrey Messing, Kesha A. Hodge, Phoenix, Attorneys for Creditor/Appellee JPMorgan Chase Bank, N.A.Monroe, McDonough, Goldschmidt & Molla, P.L.L.C. By D. Rob Burris, Tucson, Attorneys for Creditor/Appellee Colonial Capital, L.L.C.

OPINION

KESSLER, Presiding Judge.

¶ 1 Appellant Miles Elliot Reed (“Reed”), the trustee of the K.L. King Family Trust (the “Trust”), appeals from the probate court's ruling that the proceeds of a life insurance policy on Kathryn L. King (“King”) paid to the Trust as beneficiary were not statutorily protected from the reach of her estate's creditors. The court held that Arizona Revised Statutes (“A.R.S.”) section 20–1131(A) (2010), protects proceeds paid to a trust from the insured's creditors, but that the Trust waived that statutory protection. We agree with the probate court that A.R.S. § 20–1131(A) protects the insurance proceeds paid to the Trust. However, we hold there was no clear, effective waiver of that protection in the Trust language. Accordingly, we reverse the probate court and remand for further proceedings consistent with this opinion.

FACTUAL AND PROCEDURAL HISTORY

¶ 2 King died in November 2008. King had created the Trust of which her minor son, Nicholas, was the sole beneficiary. King designated the appellant, Reed, as the personal representative of her estate and the trustee of the Trust. King had also purchased a life insurance policy, which she designated an asset of the Trust, and named the Trust as the beneficiary of the policy.

¶ 3 At her death, King was “upside down” on various real estate and other loans, such that her estate had insufficient funds to pay her debts. Upon King's death, the life insurance policy paid $2,000,000 into the Trust. Although the Trust contained other assets, such as property, stocks, and bank accounts, those assets were insufficient to pay King's debts.

¶ 4 Appellee John R. DiFilippo is King's former husband and Nicholas's father. DiFilippo filed claims as a creditor against King's estate, along with Rose F. Simpkin, JPMorgan Chase Bank, and Colonial Capital, L.L.C., (collectively “Creditors”).

¶ 5 DiFilippo filed a petition asking the probate court to allow his claim against the “Estate and/or Trust.” Reed opposed the claim, arguing that life insurance proceeds were exempt from claims against a decedent's estate pursuant to A.R.S. § 20–1131(A). Reed also contended that A.R.S. § 14–10504(D)(2) (Supp.2011) protected the life insurance proceeds from Creditors. ¹ In reply, Chase, Colonial Capital, and DiFilippo argued that A.R.S. § 20–1131(A) did not exempt life insurance proceeds unless those proceeds were payable to a third person “other than the person effecting the insurance or [the person's] legal representatives.” They asserted that Reed, as trustee, was King's legal representative and that, because King purchased the life insurance policy, the statute offered no protection for the proceeds.

¶ 6 The probate court held “that A.R.S. § 20–1131(A) protects insurance proceeds paid to trusts.” However, it also held the express terms of the Trust waived the protection and directed that the insurance proceeds be used to pay debts of King's estate.

¶ 7 Reed filed a motion for clarification/reconsideration, which the probate court denied. Reed filed a timely notice of appeal. We have jurisdiction pursuant to A.R.S. § 12–2101(A)(9) (Supp.2011).

DISCUSSION

¶ 8 This appeal requires that we address two issues of first impression. First, whether A.R.S. § 20–1131 protects life insurance proceeds from the insured's creditors when the proceeds are paid to a trust whose beneficiary is a third party. Second, if the statute does protect the proceeds, whether the language of the trust documents waives such protection when that language generically provides the trust should pay the unpaid debts of the estate.

¶ 9 In construing a statute, we review the trial court's ruling de novo. Warner v. Sw. Desert Images, LLC, 218 Ariz. 121, 136, ¶ 49, 180 P.3d 986, 1001 (App.2008) (citation omitted). In doing so, the ultimate goal is to give effect to the legislature's intent. Mail Boxes, etc. v. Indus. Comm'n of Ariz., 181 Ariz. 119, 121, 888 P.2d 777, 779 (1995). In construing a trust, the goal is to determine the intent of the trustor. In re Estate of Zilles, 219 Ariz. 527, 530, ¶ 8, 200 P.3d 1024, 1027 (App.2008). To find that intent, we look at the four corners of the document. Id. We review de novo mixed questions of law and fact. In re Estate of Ward, 200 Ariz. 113, 115, ¶ 9, 23 P.3d 108, 110 (App.2001).

I. Section 20–1131(A) protects life insurance proceeds paid to a third-party trust beneficiary.

¶ 10 Life insurance proceeds paid to a decedent's beneficiary are exempt from claims of creditors of the decedent's estate pursuant to A.R.S. § 20–1131(A). See May v. Ellis, 208 Ariz. 229, 230, 231, ¶¶ 1, 11, 92 P.3d 859, 860, 861 (2004). We hold that the language of § 20–1131 is broad enough to also protect such proceeds when they are paid to a trust created by the insured in which the beneficiary is a third party.

¶ 11 Section 20–1131(A) provides:

If a policy of life insurance is effected by any person on the person's own life ... in favor of another person having an insurable interest in the policy, or made payable by assignment, change of beneficiary or other means to a third person, the lawful beneficiary or such third person, other than the person effecting the insurance or the person's legal representatives, is entitled to its proceeds against the creditors and representatives of the person effecting the insurance.

¶ 12 Statutes such as § 20–1131(A) are to be construed liberally because legislatures that have enacted such statutes wanted to encourage individuals to provide for their heirs and in doing so, protect their heirs from their creditors. See Wilmington Trust Co. v. Barry, 338 A.2d 575, 577 (Del.Super.Ct.1975); DeCeglia v. Estate of Colletti, 265 N.J.Super. 128, 625 A.2d 590, 595 (N.J.Super.Ct.App.Div.1993); Butler v. Fowler, 28 Tenn.App. 217, 188 S.W.2d 612, 614 (1944).

¶ 13 Title 20 defines a “person” as “an individual, company, insurer, association, organization, society, reciprocal or inter-insurance exchange, partnership, syndicate, business trust, corporation and entity.” A.R.S. § 20–105 (2002). Creditors cite no law in support of their contention that § 20–1131(A) does not protect life insurance proceeds paid to a trust beneficiary from the settlor's creditors, and we find none.² Title 20 defines “person” so broadly that we find a trust is an “entity” for purposes of A.R.S. § 20–1131(A). See State v. Ariz. Prop. & Cas. Ins. Guar. Fund, 192 Ariz. 390, 393, ¶ 12, 966 P.2d 557, 560 (App.1998) (“The use of a word as broad as ‘entity’ shows a legislative intent to broadly define ‘person’ for the purpose of the insurance laws.”).

¶ 14 We disagree with Creditors' argument that A.R.S. § 20–1131(A) does not protect the life insurance proceeds because King was the trustee of the Trust at the time she effected the policy, the Trust was the owner and beneficiary of the policy, and the policy was an asset of the Trust. As the Louisiana Court of Appeals aptly stated, an insured's creditors cannot reach life insurance proceeds on the life of the insured because the proceeds “do not come into existence during his life, never belong to him, and pass by virtue of the contractual agreement between the insured and the insurer to the named beneficiary.” T.L. James & Co. v. Montgomery, 332 So.2d 834, 847 (La.1976).

¶ 15 The proceeds of the life insurance proceeds were never King's nor Reed's. Although King bought the life insurance policy and named the Trust as beneficiary when she was the trustee, only her death triggered payment of the proceeds and a change in the trustee to Reed, her personal representative. ³ However, Reed was not the beneficiary of the life insurance proceeds, the Trust was the beneficiary. Neither Reed nor King was the beneficiary of the Trust; the sole beneficiary was King's minor son. Although the policy may have been an asset of the Trust, that does not affect the applicability of § 20–1131(A). Therefore, neither King (who purchased the policy) nor her personal representative (Reed) was the beneficiary of the policy proceeds and § 20–1131(A) protects the policy proceeds.

¶ 16 To avoid this result, Colonial argues that because the trust was a revocable trust, it was liable to creditors of King under A.R.S. § 14–10505(A)(3) (Supp.2011), which provides that the property of a revocable trust is subject to the claims of the settlor's creditors to the extent that the settlor's probate estate is insufficient to meet the claims. We disagree with Colonial. Section 14–10505(A)(3) provides that the trust is liable for such debts “subject to...