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Fourth Circuit issues favorable life insurance trust decision
Posted in General

The U.S. Court of Appeals for the Fourth Circuit has issued a favorable decision regarding the ability of a life insurance trust to acquire an insurance policy on the life of the grantor of the trust.

In Chawla v. Transamerica Accidental Life Insurance Company, the Appeals Court reversed a prior district court ruling that a life insurance trust could not have an insurable interest in the decedent’s life. The reasoning of the lower court, under Maryland law, was that the insurance trust did not economically benefit from the continued life of the insured, and that the trust therefore lacked the requisite insurable interest.

The decision of the Appeals Court vacated this portion of the lower court’s ruling. The Appeals Court indicated that the insurable interest issue was a novel state law matter that had not previously been decided. Because there was another legal basis for setting aside the insurance in this case, namely that the insured had misrepresented his health, the Appeals Court decided that the federal courts should refrain from ruling on the first impression state law issue, under the doctrine of judicial restraint.

While this decision eliminates an unfavorable precedent, it did not go as far as the estate planning and life insurance community had wished. It was hoped that the court would in fact hold that the life insurance trust did have an insurable interest. Absent this ruling, arguably the law in this area remains unsettled. To address this concern, some insurance companies will give a comfort letter to you if a new life insurance policy is being issued directly to your insurance trust.

  • Partner

    John is a partner in the firm's Estate Planning Department. He focuses his practice on estates, trusts, family business and disability planning, and the administration of estates and trusts. John also has an active health law ...

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