Summary
A New York trial court upheld a revocable trust of life insurance proceeds, holding that the trust was not a testamentary disposition void under the statute of wills because present rights passed to the trustee during the settlor’s life. The court reasoned that life insurance policies are assignable choses in action, and the trust deeds and absolute assignments, considered together, created a valid trust even though the settlor retained a power of revocation and enjoyment was postponed until death. The decision confirms that a trust of personalty taking effect by delivery during the settlor’s life is not testamentary, and the surrender of the power of revocation vests present title in the trustee.
Topics
Practice areas
Questions Presented
- Whether the trust scheme involving life insurance policies is valid, or is void as an attempt to dispose of the estate by deed instead of by will in contravention of the statute of wills.
Holdings
- A trust of life insurance proceeds created by deeds and assignments, even though enjoyment is postponed until death and the settlor reserves a power of revocation, is valid and not testamentary, provided present rights accrue during the settlor's life; the surrender of the power of revocation and absolute assignment vests present title in the trustee.
Key quotations
“It is expressly understood and agreed by and between the parties hereto that this agreement may be revoked, modified, or changed by the party of the first part at any time during his life, and that he may, in his discretion, cause the beneficiary or beneficiaries in any or all of said policies to be changed at any time during his lifetime, as he may wish.” (137 N.Y.S. 245)
“I having caused all of said policies aggregating $32,500, and all of the policies aggregating $62,500, to be transferred to said Russell M. Johnston, individually, instead of as trustee, and having assigned to him by absolute assignments all my right, title, and interest in said policies and each and every of them, he having, for value received, agreed that the proceeds thereof shall be charged with the same trust and used as provided in said agreements and the modifications thereof heretofore and hereby made: Now, therefore, I, James L. Scott, do ratify said transfers and assignments, and each and every thereof, and hereby, for value received of said Johnston, as such trustee, do surrender and annul my right to hereafter revoke, modify, or change the said trust agreements and the modifications heretofore and hereby made, or any or either of them, and do consent and agree with said Russell M. Johnston that the transfers to him for the purposes aforesaid be and they are hereby made absolute, irrevocable, and unchangeable forever.” (137 N.Y.S. 245)
“A will has no effect whatever until the death of the testator, and conveys no interest prior thereto. An instrument which has effect during the life of the maker and passes some right or interest before death, even though enjoyment is postponed until after death, is not testamentary in character, but is a grant or a contract.” (137 N.Y.S. 246)
“(1) A designated beneficiary; (2) a designated trustee, who must not be the beneficiary; (3) a fund or other property sufficiently designated or identified to enable the title thereto to pass to the trustee; and (4) the actual delivery of the fund or other property, or of a legal assignment thereof to the trustee, with the intention of passing legal title thereto to him as trustee.” (137 N.Y.S. 247)
Factual background
James L. Scott, in December 1910, held nine life insurance policies on his life totaling $95,000, naming various beneficiaries including his wife, son, and Russell M. Johnston as trustee. Each policy reserved a right to change beneficiaries. Over time, Scott changed beneficiaries until, by December 1911, Russell M. Johnston as individual (not trustee) was named beneficiary in all policies, and Scott renounced the right to change beneficiaries. On December 31, 1910, Scott executed two declarations of trust specifying how the insurance proceeds were to be applied by Johnston after Scott's death; both allowed revocation or modification. From time to time Scott exercised the right of revocation and modification, lastly on December 29, 1911, by which he ratified absolute assignments of the policies to Johnston individually, reciting that Johnston agreed the proceeds would be charged with the same trust and surrendering the right to revoke. Scott died January 9, 1912, leaving a will giving property to his widow Anna M.B. Scott and son Gordon B. Scott; his estate was solvent and no creditors' rights were involved. The insurance companies paid the proceeds to Johnston. The widow and guardian ad litem for Gordon claimed the trust scheme was void as an attempt to dispose of the estate by deed rather than will.
Procedural history
In December 1910, James L. Scott procured nine life insurance policies and created two trusts (trust deeds) naming Russell M. Johnston as trustee. Scott later modified and revoked provisions, assigned the policies absolutely to Johnston individually in December 1911, surrendering his right to revoke. Scott died January 9, 1912. His widow and guardian for a son challenged the trust scheme as void. The action was brought in New York Supreme Court for declaratory relief.
Remand instructions
Ordered accordingly (the two trusts created by James L. Scott are held valid).