Michigan Supreme Court Protects 401(k) Payments and Life Insurance Proceeds to Trust from Creditors

If you have a 401(k) and/or a life insurance policy, and use a revocable living trust in your estate plan, a recent decision from the Michigan Supreme Court could bring you peace of mind. Generally, Michigan law provides that the assets of a trust, including assets payable to the trust upon the death of the settlor, are subject to the claims of creditors if the trust was established as a revocable trust but was rendered irrevocable by the settlor’s death. However, in the case of In re Fowler Estate, the Court clarified two statutory exceptions to this general rule. The Court ruled that 401(k) retirement payouts and life insurance proceeds delivered into a trust are protected from creditors.

Under a tragic set of facts, the case involved an insolvent estate facing a large wrongful-death judgment, raising questions about whether creditors could reach funds flowing from a 401(k) and a life insurance policy into the deceased’s revocable trust instead of the probate estate. The Supreme Court resolved the issue by confirming that Michigan law shields both types of payouts. Under MCL 700.7605(2), the Court determined that all payments from a 401(k) are “not part of a revocable trust liable for creditor and other claims.” The Court also held that the life insurance proceeds were exempt from creditor claims, stating:

MCL 500.2207(2) places life insurance proceeds outside the reach of the insured-decedent’s creditors unless the proceeds are paid to their estate (i.e., to “the insured” or their “executors or administrators”). This falls within MCL 700.7605(4)’s exemption for trust proceeds that would be outside the reach of creditors if “paid... other than to the settlor’s estate.”

This ruling, though unfavorable to creditors, is important for most people and estate-planning attorneys. If you’d like, you can read more about the case here. If you want to discuss further, our estate planning team at Curtis, Curtis & Brelinski, P.C. is ready to help.

Disclaimer

This publication is for general information only. The information contained is not intended as formal legal advice. If you have any questions or need assistance, please contact your attorney at Curtis, Curtis & Brelinski, P.C.

Article by: Ethan J. Loch