A recent Michigan Supreme Court decision caught my attention because it answers an important estate planning question: What happens when life insurance or retirement benefits are paid to your revocable living trust after your death? Can your creditors reach that money?

In In re Estate of Fowler, the Michigan Supreme Court ruled that certain life insurance proceeds and 401(k) benefits paid directly to a revocable trust were protected from the deceased person’s creditors.

That is an important decision for Michigan families because beneficiary designations are a major part of a good estate plan.

Why This Matters

A revocable living trust is commonly used to avoid probate and provide instructions for how property should be handled after death.

During your lifetime, however, you generally still control everything in your trust. Because of that control, assets you place into your trust during your lifetime are generally available to satisfy your creditors after death if your probate estate does not have enough money to pay them.

But Fowler involved a different question.

The deceased woman had named her revocable trust as the beneficiary of two important benefits:

  • Life insurance through her employer
  • Her 401(k) retirement account

After her death, a creditor had a claim of more than $600,000. Her probate estate did not have enough money to pay it, so the question became whether the creditor could reach the life insurance and retirement money that had been paid to her trust.

The Michigan Supreme Court said no.

The Court found that Michigan law contains specific protections for these types of benefits.

The 401(k) proceeds were protected because Michigan law specifically excludes payments from certain qualified retirement plans from the general rule that allows creditors to reach assets of a revocable trust after death.

The life insurance proceeds were also protected. Michigan law generally protects life insurance proceeds from the insured person’s creditors when the insurance is payable to someone other than the insured person or the insured person’s probate estate. The Supreme Court determined that naming a revocable trust as beneficiary did not eliminate that protection.

That distinction is important.

Money you personally place into your revocable trust during your lifetime may be treated differently from protected life insurance or retirement benefits that flow into the trust because of a beneficiary designation after your death.

Beneficiary Designations Are Part of Your Estate Plan

One of the biggest lessons from Fowler is that estate planning involves much more than simply creating a trust.

You also have to consider how your assets get to the trust.

Life insurance policies, IRAs, 401(k)s, annuities, and other accounts often pass according to beneficiary designations. Those designations can affect probate, taxes, creditor protection, and ultimately who receives your property.

That is why we spend time reviewing beneficiary designations as part of the planning process.

Simply having a trust does not answer every question. The way an account is titled and the beneficiary named on it can sometimes be just as important as the terms of the trust itself.

Simple Lesson

A good estate plan is not just about where your property goes. It is also about how it gets there.

The Fowler decision is a good reminder that seemingly small choices—such as how a beneficiary designation is completed—can have significant consequences after death.

Action Step

Take a look at the beneficiary designations on your life insurance and retirement accounts and make sure they still match your overall estate plan.

This is especially important after a marriage, divorce, death in the family, retirement, or any major change in your financial situation.

If your trust is named as a beneficiary, make sure that choice was intentional and that you understand why it was structured that way.

If you’d like help reviewing your plan, call (517) 548-7400 or connect with us here: https://www.michiganestateplans.com/contact-us