The Testamentary Character of Personal Unfunded Life Insurance Trusts

Abstract

*The author wishes to acknowledge his indebtedness to B. E. Farr, Esq., of New York City, for his many helpful suggestions during the preparation of this article. t B. S., I923, Dartmouth College; LL. B., i926, Harvard University. Member of Pennsylvania and Ohio Bars. ' Personal life insurance trusts are illustrative of one method of disposing of insurance proceeds. The so-called optional or deferred contract sponsored hy insurance companies is another type. Under the latter settlements the insured enters into a supplemental agreement with the insurance company providing for payment of the proceeds to the designated beneficiary in various ways other than by one lump sum payment. Since the parties do not contemplate, and insurance companies do not in fact allocate or segregate, any portion of their assets as a trust res under a particular contract, it is difficult to contend that a trust is created. Instead, the arrangement appears to be a contract giving rise to a debt upon the death of the insured; see HORTON, POWER OF AN INSURED TO CONTROL THE PROCEEDS OF His POLIcIES (i926) 49; Bogert, Some Recent Developments in the Law of Trusts (1929) 23 IiL. L. REV. 749, 753; Note (1927) 36 YALE L. J. 394; Note (Ig33) 46 HARv. L. REv. g8i. Many insurance companies include in such settlements a covenanlt guaranteeing a certain yield on principal. The use of the word guarantee may be questioned but its use by the companies strengthens the view that only a contract obligation is involved. Under this view, the question of whether there is a testamentary disposition i's no different than in the case of the ordinary life insurance policy calling for one lump sum payment to a designated beneficiary wherein the insured reserves a right to change the designation of the beneficiary. For authorities supporting the view that a trust is created, see Note (1933) 46 HARv. L. REv. 8I8, 8I9. If this latter view is adopted, testamentarv problems similar to those presented by life insurance trust settlements must be considered. 2 Note (I933) 46 HARV. L. REv. 8i8 n. I. ' In the case of a proposed settlement the problem could be avoided by executing the trust instrument with the required formalities. Federal Trust Co. v. Damron, 124 Neb. 655, 247 N. W. 589 (1933); Phipard v. Phipard, 55 Hun 433, 8 N. Y. Supp. 728 (I89o); see also Scott, Trusts and the Statute of Wills (1930) 43 HARV. L. REv. 521, 534. Or the