THE LIFE INSURANCE TRUST IN TEXAS
DELI NDA EBElI NG
THE · LIFE INSURANCE TRUST IN TEXAS
The use of the life insurance trust in Texas as a means of estate
planning is somewhat unusual in that from looking at the cases, a life
insurance trust as such is seldom used.
In Texas as well as in other
jurisdictions, the distinction to be found is that life insurance has been
used as the source of a trust rather than having been created by the insured
himself as an express written trust.
Most of the cases which have arisen
concerning insurance and trust doctrines have done so on the basis of an
implied trust -- the insured takes out a life insurance policy and names a
beneficiary either with or without an understanding with that beneficiary
that the proceeds will be used to benefit a certain person or group.
So
while the insured intends to create a trust, he does not do so expressly,
and consequently, these matters, usually within the family, wind up in the
courts to determine exactly who is entitled to enjoy the proceeds of the
insurance.
The cases in Texas in particular have generally followed this line of
facts, and as a
res~lt,
the courts have not dealt with all of the potential
questions that can arise in such a situation unless their failure to deal
with them indicates a rejection of those problems.
For example, the court$
never seem to speak of a trust as being inter vivos or testamentary, yet the
tones and holdings in the cases appear to indicate that the trusts found
are inter vivos and not testamentary -- it is simply an issue to which the
courts have not directly spoken.
For this reason and others, it is necessary
to more fully explore the area by looking at some of the decisions in other
jurisdictions involving similar cases.
Some of the courts do take different
approaches to reach comparable solutions, and some of these ideas might well
extend into Texas law.
There is no longer a problem as life insurance has been established as
property by the Texas legislature, thus making it clear that it is something
which can be used by an insured in either planning for his family or business.
Tex. Rev. Civ. Stat. Ann. Art. 23(1) (1969). But this will not solve all the
dilemmas in determining exactly what the nature of life insurance is.
Under
the same statutory definition,an insurance policy is said to be a chose in
action which matures at the death of the insured.
696 (1963).
Tex. Rev. Civ. Stat. Ann.
~rt.
Brown v. Lee, 371 S.W.2d 694,
23(1) (1969).
Clearly, a life
insurance policy holds nothing for the beneficiary until the insured dies,
but this does not make it any less certain as a -potential trust res.
The fact that the trust dealt with a contingent interest of the insured
in the certificate of insurance is of no moment. That interest
became vested at the death of the insured, and, the beneficiary having
collected the insurance money, the trust, under the agreement creating
and acknowledging it, attached to the fund. A trust of this character
is not to be distinguished from assignments of contingent interests,
which courts of equity recognize as valid. Hirsh v. Auer, 146 N.Y. 13,
40 N.E. 397,398 (Ct. App. N.Y., 1895); and Rape v. Gardner, 54 S.W.2d: 594,
596 (Te-x. Civ. App.-..Eastland, 1932), reh. den.
Other courts have regarded life insurance as a mere contingent interest
but have said that the :- beneficiary is not without power to deal with the
interest or· that he cannot enforce it in equity when it does become vested.
Kerr v: Crane, 98 N.E. 783,784 (5. Jud. Ct. Mass.1912).
been hel d that
e\'en ~
Further, it has
though the proceeds are not payabl e unti 1 the death of
the insured, the trust will not be testamentary; even better, insurance trusts
will be upheld though not executed with the
Ballard v. Lance, _6 N.C. App. 24, 169
S.E~
formalitie~of - a
will.
2d 199, 202 (C.A.N.C. 1969).
The
rationale for such holdings is so obvious that most courts never bother to
state it; life insurance by its very nature can be personal property of the
insured only upon his death, and any claim that proceeds are testamentary
simply does not comport with logic.
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The Texas statute s~ems to avoid the problem of whether an inter vivos
trust is testamentary.
None of the Texas cases dealing with life insurance
trusts have invalidated them on the basis of being testamentary as a few
jurisdictions have done.
But the Texas trusts have generally not been dependent
upon wills, and the courts have simply found that the dispositions were made
during life, and while intended to be effective upon death, they had not
become testamentary, primarily because of the nature of insurance itself
there
is no interest in a beneficiary until the insured dies, thereby leaving no
interest which can be presently enjoyed.
However, for a conflicting view
holding that rights,to proceeds to a beneficiary does not arise from the
death of the insured but rather from the contract when taken out, see
Union Trust Co. of Pittsburg v. McCaughn, 24 F. 2d 459 (E.D.Pa. 1927),
apparently contrary to the general view that the beneficiary has no rights
under a life insurance contract when the insured has power to change the
beneficiary.
Probably the best view stating that such a trust is not testamentary was
expressed by a Florida .court:
By the nature of life insurance contracts, the major benefits to be
derived therefrom do not accrue until the death of the insured.
Merely because this was the nature of the trust res, the trust should
not be considered testamentary. As we have pointed out above, the
interest which passed to the trustee under the trust instrument was
substantial and imposed a clear-cut duty on the trustee. Furthermore,
the trust had a substantial existence during the life of the settler and
should not be considered testamentary. In ReEstate of Herron, 237 So.
2d 563,568 (Fla. D.C. App. 1970), reh. den; ' Res. 2d Trusts, § 57.
A common purpose for applying the trust doctrine to insurance proceeds
aris~in
situations where a person desires to protect a minor child or
relative, and many of the Texas cases have come before the courts under
these facts.
One of the earliest cases, Clausen v. Jones, 18 Tex. Civ. App. 376,
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45 S.W. 183 (Tex. Civ. App.
1898), applied the trust theory very strictly.
There the husband had made the second wife and children of a prior marriage
beneficiaries in a life insurance policy issued by a fraternal organization
and had later changed the designation to the wife as the sole beneficiary.
When the husband died, the children claimed that their father had changed
the beneficiary of the policy only for convenience in collection of the
pol icy and that the second wife was only to coll ect t\'.ro-thi rds of the proceeds
in trust for the children.
The wife denied that this had been her husband's
wishes but agreed to carry it out if the court found a trust existed.
The
lower court did not, and it further rejected allegations by the children to
the effect that the wife was a "mean stepmother".
In its holding, the
appellate court held the wife to a very limited trusteeship in that she was
only a trustee to collect the proceeds, and it agreed that the lower court
was correct in omitting the evidence regarding the mother's treatment of
the children.
However, the court made it quite plain that a further duty
would be found had the wife's trusteeship been extended further to hold and
use the proceeds for--the children.
Absent such a duty, there was basically
no revi ewab1 e conduct for the court to examfne.
184.
C1 ausen v. Jones, supra ,at
The case was reversed to the extent that a requested charge should have
been given to the effect that the deceased could make a provision for the
children to share in life insurance proceeds, and it therefore appears to be
an issue of fact to determine what portion and what funds may be used to
satisfy the insured ' intent.
Clausen v. Jones, · supra ,at 185.
In discussing a life insurance trust, it is essential to examine first
the requirements in creating such a trust.
In the first instance,
most of the
life insurance trusts which have reached the courts have been the result of
statements made by an insured to another person regarding his intent, and
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the issue then becomes whether or not a trust can be created in life
insurance or in the proceeds by parol ev idence since no written documents
generally evidence the parties' intent.
The courts have been positive in declaring that a trust can be created
in any kind of personal property and may be proved by parol evidence.
Allen v. Withrow, 110 U.S.119, 130, 3 S. Ct. 517, L.Ed. 90 (1884); Eaton
v. Husted, 172 S.W.2d, 493,497 (Tex. 1943) reh. den; Brault v. Bigham,
493 S.W.2d 576,578-79, (Tex.Civ.App. -- Waco, 1973), reh. den.; Ballard v.
Ballard, 296 S.W.2d, 811,816 (Tex.Civ.App.
Galveston, 1956); Rape v. Gardner,
supra, at 595; Haberland v. Haberland, 303 F.2d, 345,347 (3rd Cir. 1962),
reh. den.; Fahrney v. Wilson, 180 Cal. App.2d, 694, 4 Cal. Rptr. 670-673,
(D.C. App. 1960), reh. den.; Rosen v. Rosen, 167 So.2d,70,72 (Oist. Ct.
App. Fla., 1964); Crews v. Crews' Admin. 113 Ky. 152, 67 S.W. 276 (Ky. Ct.
App. 1902); Cooney v. Montana, 196 N.E.2d, 202,206 (5 Jud. Ct. Mass. 1964);
-
and Hirsh v. Auer, 146 N.Y. 13, 40 N.E. 397 (Ct. App. N.Y. 1895).
The standard necessary to uphold a parol trust has not been seriously
disputed.
The
Fahr~ey
court, supra, at 673, said that the evidence to
establish a parol trust must be clear and convincing, especially where the
declarant is dead, and this is a matter for the trial court's determination,
not to be upset if the evidence is sufficient.
The court went on to say
that the proof could be indirect, i.e. through acts, conduct, or circumstances,
and that words such as "trust" and "trustee" were not necessary if the intent
were otherwise clear.
.By requiring a "clear and convincing" standard, the
danger is averted that the court will be enforcing a bare promise to
give or will by completing an otherwise incomplete gift.
116 F.2d, 1017, 1018 (2nd Cir. 1941).
-s-
Cullen v. Chappell,
Probably the most definitive statement
I
was made by the United States Supreme Court in Allen v. Withrow, supra, at
129-30,
where it was said:
So far as the personal property conveyed to Withrow is concerned, it
must be admitted that a trust may be established by parol evidence;
but such evidence must be clear and convincing, not doubtful, uncertain,
and contradictory, as ill this case. The evidence must consist of
something more than loose conversations with third parties. The
declarations of the grantor relied upon must be made at the time of his
conveyance or while he- retains an interest in the property, and be so
connected with the conveyance as to justify the conclusion that it was
-made or is held in execution of the purposes declared. Declarations of a
purpose to create a trust not carried out are of no value, nor are
direct promises to that effect unaccompanied with considerations turning
-them into contracts.
Most of the cases -which have found a. trust have been based on more than
idle conversations where the insured took out the policy, at the same time
expressing to the beneficiary that he was taking the policy for the purpose
of protection of some third person or by expressing to an employer or a
friend that he was taking certain action for a certain purpose.
In this
regard, the parol evidence is a matter for the trier of fact to judge since
that person or persons is best able to pass upon the credibility of the
witnesses, a task which the appellate court is by nature unable to perform.
E-ven -though a trust can be created if!
thi~
still be found in order to validate a parol
and Trust Co., 195 N.E. 2d 862
manner, certain elements must
trust.
Payy v. Peoples Bank
(Ind. App. Ct. 1964), reh. den.
be an expressed purpose of the trust.
There must
The Supreme Court of the United States
in Allen v. Withrow, supra,at 130, briefly discussed this problem, though the
thrust of the case was directed toward a trust in real property rather than
personalty.
There the court made a statement that "(d)eclarations of a
purpose to create a trust not carried out are of no value, nor are 9irect
promises to that effect unaccompanied with considerations turning them into
contracts."
Allen v. Withrow, supra,at 130
-6-
The court seems to be saying
that the mere expression of a trust purpose will not be sufficient in itself
to create a trust in personalty without some form of consideration.
However,
in the usual situation, it is hard to determine exactly who is giving
consideration.
On the one hand, the settlor creates the trust and receives
in return a promise from the beneficiary to carry out his intent at his
death.
Kerr v. Crane, supra, at 784, but this has problems inherent in it
from the outset since courts are divided as to whether the beneficiary must
know that he is to be the trustee, the majority holding that he does not
have to have such knowledge.
On the other hand, in creating the trust the settlor is giving
consideration to the beneficiary by making him the recipient of the
insurance proceeds at the settlor's death.
The Clausen case, supra, is a good example of this principle.
The
Texas court seemed to be grasping to find that a trust had been created,
and no trust purpose was expressed at all -- the husband had merely changed
the beneficiary from the second wife and children to the second wife.
court, though
holdiD~
The
the wife to a limited trusteeship, nevertheless found
that the "purpose" of the trust was the collection of two-thirds of the
proceeds for the children.
Possibly the court was exercising its equitable
powers in thinking that the children were the natural objects of the father's
bounty; however, the opinion does not show any evidence upon which the court
might have reached its result.
Another question is how expressly the purpose must be stated.
The
general trend has shown the expression of purpose not to be written in the
policy but orally
in statements from the insured to another person .
One of
the most notable Texas cases is Eaton v. Husted, 172 S.W.2a: 493 (Tex. 1943),
reh. den.
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The facts of the E~ton case make it one of the most interesting on
the subject, and because of their relevance, they are worth recounting.
The plaintiff was an illegitimate child who lived with her grandmother in
New London, Texas, until she was five when she was taken from that part of
the state due to her grandmother's illness and inability to care for her
anymore.
At that time, a family conference was held to determine what was
to be done with the grandmother, and a son agreed to take her into his home,
but he refused to take the little girl because of the influence he thought
she would have on his children as an
waif that no one ·wanted.
ill~gitimate
child -- the picture of the
Finally, the half-sister of the plaintiff's mother
agreed to take her, and plaintiff did not see her grandmother again nor the
members of her mother's family for many years.
She subsequently married and
moved to California and lost track of any family.
Plaintiff's contacts with
her family were rekindled in 1937 when she heard a news report of the New
London schoolhouse explosion.
Concerned that members of her family might
have been among the injured or killed, she wrote to the sheriff to see what
she could learn, and." as a result, ·she eventually brought suit in 1941.
Plaintiff had learned that her grandmother had settled with all the members of
her family except plaintiff's mother who had died after her birth, and the
grandmother refused to leave to live with her son until he would agree orally
to manage her estate for her benefit during the remainder of her life and
then for the plaintiff's benefit until she was twenty-one, at which time she
was to receive the property.
Plaintiff alleged that under this oral trust
agreement, the grandmother deeded two tracts of land, a bill of sale to her
personal property of furniture and ten promissory notes, and a life insurance
policy to be administered under the trust, but she alleged that she had not
brought an action for enforcement earlier because she had no knowledge of
the facts.
She further ·c1aimed that the son accepted the terms of the trust
as trustee and never repudiated it.
She sought to recover one-fifth of
all the properties under the trust because the trustee had so commingled
the property as to not be able to distinguish what should have been hers.
Other heirs of the grandparents did not deny that a trust existed but
cross-claimed that it existed for the benefit of all heirs.
Without going into all of the complicated determinations as to the real
estate, the lower court decided that the trust did extend to all other heirs
living at the grandmother's death and found that the trust existed on the
real and personal property until plaintiff was twenty-one.
Plaintiff was
given a one-eighth interest in two tracts and an undivided one-eighth interest
in oil royalties.
The Court of Civil Appeals at Texarkana affirmed the
judgment except for the judgment against a non-resident defendant, and
the defendant appealed, but the Texas Supreme Court affirmed.
The primary issue on appeal was whether the court was justified in
finding a parol trust instead of a simple agreement to manage the property.
The court found that-·-t.here definitely was an expressed purpose of the trust,
sUbstantlated by the testimony of several witnesses who testified that the
grandmother remained concerned until she died that plaintiff would get her
share of her property as she wished and testified that the son agreed to
carry out this purpose.
The court also found the element that the United
States Supreme Court looked for in Allen v. Withrow • . supra. that is,
consideration; the bill of sale for the grandmother's p.e rsonal property
included the life insurance policy. and it was recited that the transfer was
made "for value received."
Eaton v. Husted, supra, at 496.
The defendant
claimed that the life insurance policy was not under the trust because it was
issued by an organization which no longer existed and the records of which
had been lost so that the grandmother made the son the beneficiary to collect
the proceeds.
However, the trustee's brother testified that the insurance
had been expressly listed by the grandmother as a part of the trust, and the
court also found that it was very significant that the son was made the
trustee of the policy at the same time the other property was deeded to him,
regarding these facts as evidence that the policy was part of the trust and
was accepted by the trustee as such.
interesting twist concerned the land.
Eaton v. Husted, supra, at 497.
Another
There was testimony to the effect
that the trustee told a friend that he had $900 of the insurance money buried
in a fruit jar in the garden, and the evidence also showed that one of the
tracts of land that the trustee brought was paid for with $900 cash.
Of
course, the court did not say that the story was true or not true, but it
merely said that the jury believed the story, impressing part of the land with
the trust as a result of a type of tracing theory.
Another element besides the
e~pression
of a trust purpose is the
expression of the subject matter of the property to be impressed with a
trust.
GenerallY,~his
has not been the element which causes the problems
since in the cases concerned with life insurance proceeds, the insured, if he
said anything whatsoever about a trust, said that he was buying the policy
as the res of the trust.
A third element is that the objects or beneficiaries must be determinable.
In the Eaton case, the plaintiff-granddaughter was clearly intended to be the
beneficiary of the grandmother's trust since the grandmother was so worried
that the plaintiff should have her mother's share in the property.
have been other cases where this element was the one in question.
But there
The
courts apparently will look at the beneficiary or object of the trust to
determine if that person is indeed the one who should be benefited.
An often cited Pennsylvania case is illustrative of this problem.
Donithen
v. Independent Order of Foresters, 209 Pa. 170, 58 A. 142 (Pa. 1904).
In that case the husband had a policy from a fraternal order for $1,000
with his brother listed as the beneficiary.
The wife, at her husband's
death, claimed that the brother was trustee for her, but the brother claimed
the proceeds for himself.
The wife claimed that the payment to the brother
was in contravention of the policy to protect the widows and orphans of its
insureds first.
The court agreed with the wife that a parol trust existed
on the proceeds because of testimony indicating that the husband had
expressed his wishes that the proceeds would take care of his wife and pay
the outstailding debts if anything should happen to him.
The court, in
reaching its decision, looked at the circumstances of the parties,
Donithen v. Independent Order of Foresters, supra, at 143, and its statement
is indicative of the trend where the issue of a proper object of the benefit
is in question:
Was it probable that the thoughts of this young husband,
engaged in a hazardous employment, would turn to making a
money provision for this brother--~ould prompt him to take
upon himself the annual burden of payment of dues on a
$1000 certificate the remainder of "his life for the sole
benefit of this brother, who was not necessitous, to the
exclusion of his young wife, Who he knew in case of his
death would be?
It was concluded by the court that the husband had put the policy in
his brother's name because he was more established and experienced in
business than his wife who was still very young, and the evidence indicated
that he did not trust his wife's mother with the money and that the brother
would be in a better position to pay the debts of the parties so that the
wife would not lose their home and other property.
Basically, the court
looked at the facts of the case to determine that it was not reasonable that
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the husband should prefer to provide for another person when the logical
object of his affection and bounty would be in need.
A Texas
Ballard v. Ballard, supra, is an important case
case~
representing the same principle.
The father and mother had been divorced
a short time earlier, and the father changed his group insurance policy
into an ordinary life insurance policy when he left his :employment.
When he made the change, he made his brother
beneficiary~
stating to
several individuals that he knew the brother would see that his little
girl was cared for.
The brother never told the wife of the money he
received, and she brought the suit for her daughter when she learned of the
policy several years later.
The brother's attorney said that the policy
had been left to the brother "with instructions", and the word "trust"
was never used to describe the relationship.
The brother disclaimed any
knowledge of a trust or that there had been any condition to his being
mmed beneficiary.
fact
exist~
property
The court, however, in determining that a trust did in
looked at the family situation, the brother's salary, his
holdings· ;<.,. ~nd
in particular at the fact that the insured owed no
debts to his brother that the policy could be deemed to be repaying, and
essentially, the court placed the burden on the brother to justify his
being beneficiary of the policy.
In holding that this burden had not been
met, the court stated:
Mr. Ballard (brother) developed no relationship between himself
and his deceased brother -- or any other fact -- which would
tend to explain why his deceased brother would have undertaken
the payment of premiums on the $13,000 policy for the purpose of
providing a fund for Mr. Ballard's benefit to the exclusion of
his own infant daughter. Ballard v. Ballard, supra, at 815.
The court even went so far as to determine that it was "unnatural" for
a father to provide for his brother and not his daughter and found that
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the father had in mind a living, active trust for his daughter's welfare,
and if not an active trust, then a dry passive trust to collect the
proceeds for the daughter's benefit.
819-20 .
Ballard v. Ballard,supra, at
Hence, it- appears that before a court will allow a beneficiary
of a policy to collect and use the proceeds for himself, it will first
look to see if that beneficiary is a natural object of the insured's
bounty or whether someone else, such as one contesting the beneficiary',s
right to the proceeds, is a more appropriate person to be benefited by
the funds.
A slightly different problem can arise when the named beneficiaries
are natural objects of the insured's bounty, but suit is brought to expand
the class.
This was the situation in Ballard v. Lance, 6 N.C. App. 24,
169 S.E. 2d 199 (C.A:N.C. 1969), in which the deceased purchased flight
insurance before leaving on a plane trip.
space in which to list two beneficiaries,
On the form there was only
~nd
the record showed that it
had been her practice to name different grandchildren each time.
laughi~gly
She
selected. two names and put them ' in the spaces, at the same
time telling her daughter that should'anything happen to her, she wanted
the two named beneficiaries to share in one-half of the proceeds and the
other grandchildren to share in the other half.
The plane did crash, and
the grandmother and one of her grandchildren were killed.
The lower court
determined that a trust in law had arisen and declared that the two named
beneficiaries held half the proceeds in trust for the other grandchildren
and held that the plaintiff as guardian
of the two beneficiaries held that
half of the proceeds as trustee for them as minors.
In affirming, the
appellate court held simply that a trust was created under the oral
statement of the grandmother to her daughter and that a trust could be
created without any mention of it in the policy
at 202
Ballard v. Lance, supra.
Neither did it affect the outcome that the trustees were minors.
The court does not answer the question of how minors are to carry out the
functions of trustees, but presumably their functions would be controlled
by a guardian or a co-trustee.
Thus, the case indicates that the class
of persons intended to be benefited could be extended beyond named
beneficiaries when a parol trust could be established by the evidence.
The fourth element that is necessary to establish a parol trust
is expression of the manner in which the trust is to be performed . .{Pavy.~ supra,
aL·.366.)
The case of Burgess v. Murray, 194 F. 2d 131 (5th Cir. 1952L
reh. den4 is a good example of this principle.
The husband set up a life
insurance policy, designating his father and sister as beneficiary and
contingent beneficiary respectively.
He then wrote a letter to his father,
explaining that the father was to take care of his children if he should
die and
u~e
the proceeds in case of sickness or other emergency; if there
were no emergency needs, the proceeds were to be saved to be used for the
children's educafi·on.
The father died, and the sister became the
beneficiary, claiming the proceeds for herself upon the husband's death.
His wife sued to have the sister declared a trustee, but the sister denied
that the letter in question created a trust or that it was intended to
apply to her.
In short, the court held that it did establish a trust and
that the proceeds should be given to a guardian who could qualify, i.e. the
wife.
Clearly, the trust had a purpose .in providing for emergencies and
subsequent education of minor children; the beneficiaries were certain, but
the court had to use its equitable powers to compel the trust's enforcement;
the court found that it was definitely the proceeds of the policy which were
to be impressed with the trust; and finally, the method of carrying out the
_-14-
terms of the trust was definitely set out by the insured that disbursements
should only be made upon certain contingencies.
An interesting question was brought up by a defendant in a
Massachusetts case' Cooney v. Montana, supra, where -the sister was named
as beneficiary of a life insurance policy by her brother who told her that
the proceeds were to be spent primarily for education.
The lower court
ruled that the money belonged to the sister to do with as she chose, flee
of trust, and that she was bound by no legal obligation, though perhaps by
a moral one.
Cooney v. Montana, supra,at 204-5.
Because the brother had
died accidently, the policy paid double indemnity, and the sister had
kept the $10,000 amount he had requested in a safety deposit box in the
bank in cash but had used the remainder for her own purposes and had kept
no records.
Her supposed obligation was to provide especially for two
younger children, one of which was in a hospital school,and a third who
was in need
of the
funds for educational purposes.
Finally, the sister
disclaimed any responsibility for the children and chose to have nothing
more to do with them.
In line with most jurisdictions, the appellate
court reversed the lower court, holding that there had been a trust
established, yet the moral obligation theory is certainly one that a
defendant would want to argue in trying to retain proceeds for himself.
However, in view of the majority of the decisions, this would not be
profitable for the beneficiary.
Further, the beneficiary might encounter
the result that the beneficiary/trustee did in Cooney,who was removed
from her position.
The court determined that because the husband had
given his instructions expressly to the sister and explained how he wanted
the money used, it was therefore his intent that the sister use none of
the proceeds for herself, assuming that it would be the minimum recovery
-15-
of $10,000. Cooneyv. Montana, supra, at 208· Under these circumstances,
the sister accepted the trust and did not repudiate it and was therefore
under an obligation to use reasonable skill, prudence, and judgment,
including a duty to keep accurate records.
at 208:
"Cooney v. Montana, supra,
Because the sister was not performing the duties the father
had entrusted in her and because she was allowing the money to sit in
the bank earning no income, she was removed, and the cause was remanded
to the lower court to appoint a new trustee.
It seems inevitable that at some time a court will find that
a trust has not been created for one reason or another.
Any trust which
does not meet the requirements set out will fail automatically because
there must be a degree of definiteness and certainty in the formation of
a trust, whether oral or written. Pavy v. Peoples Bank and Trust Co.,
supra, at 866.
\·Jhile the result of the case was to invalidate the
attempted trust, the courtls reasoning is a little less clear.
The
court set out the requirements of a parol trust already discussed and
went on to say -that the trust here failed because it did
~ot
meet those
elements -- changing the beneficiary was of itself i"nsufficient to
create a trust.
Pavy v. Peoples Bank and Trust Co.,- supra, at 867.
The bank had not known it was to be the trustee; thus there were no
trust terms stated either in the policy or in the instrument changing
the beneficiary.
The court concluded that the trust could not be valid
apparently on the basis of the will
tha~
the insured subsequently
executed as it made no mention of any life insurance policy or to the
instrument changing the beneficiary, and therefore, the so-called inter
vivos trust and testamentary trust could not be related.
But the court
still had to do something with the proceeds, and it stated the
-16-
"elementary" rule that where a person attempts to create an express
trust and fails, a resulting trust arises in favor of the settlor or
his estate, and the property concerned, here the policy proceeds,
reverted to the estate so that the creditor was allowed to take his share
from the estate . . Accord, Union Ttust Co. 6f Pittsburgh v. McCaughn,
24 F. 2d 459 (O.C.E.O . Pa. 1927).
The Pavy case, though not binding on Texas courts, is still
somewhat puzzling .
When compared with other cases which seemingly had
no difficulty in finding that a parol trust existed with no more facts
than this case.
It is a bit difficult to reconcile the decision of
this court that the inter vivos trust had to relate to the testamentary
trust found in the will.
The court, in its opinion, does not indicate
that there was any intent by the deceased that the insurance trust be the
same as the testamentary trust in the first place.
Even if one looks at
the four elements the Pavy court sets out, there seems to be no reason
why all four cannot be found in the facts; the purpose of the trust
was implied in ·h·is concern for his wife's ability at that time to manage
the proceeds; the subject matter obviously was the proceeds since he
executed the change of beneficiary instrument; he clearly set out the
bank as the beneficiary and the instruments set out the manner in which
the trust was to be performed, i.e. for the benefit of the wife.
was clearly not intended to be a testamentary disposition.
This
He had
established the policy much earlier and changed the beneficiary upon the
wife's illness, not in anticipation of his immediate death, which mayor
may not have been contemplated at the time.
The fact remained that he
had set up an inter vivos trust by the execution of the instrument
changing the beneficiary, and it was not necessary to do so with the
-17-
formalities of execution of a will.
It would seem that the court was not
justified in determining that because the proceeds were large and the
remaining estate was small that the deceased could not have been
intending to create a trust from the smaller portion of the estate, or
at the least, that the insured was trying to incorporate the trust
under the will by reappointing the bank as its trustee .
Undoubtedly,
both sides of the arguments have flaws in them, but in general, it would
not appear that the Indiana court is in line with many of the
jurisdictions, including Texas . . .
A Florida court took a contrary view, stating that not having
trust terms · set out will not justify a court's modification of the
contract.
Rosen v. Rosen, supra, at 72 .
While the Pavy instrument
omitted any terms of the trust other than that the bank was to be
trustee for wife, the Rosen policy omitted any mention of a trust in
any document.
The insured had set up two policies with his minor sons
as beneficiaries, later changing the beneficiary to his father.
At
his death
th~
proceeds~
arid the court, finding a trust, declared that the proceeds
father and the guardian of the children both claimed the
were not to be paid to the beneficiary but to the guardian.
Rosen, supra , at 72.
Rosen v.
The appellate court agreed that there was a trust
but said that proceeds of a policy can only be paid to the named
beneficiary.
to step in
~nd
To authorize the payments to the guardian was for the court
change a contractual arrangement between the parties,
something that could not be done.
Rosen v. Rosen, supra, at 72.
Here
there was even less evidence that the insured intended to establish a
trust, but the court still found that from the circumstances this was
his intent, yet the Pavy court so modified that contractual agreement as
-18-
to invalidate
it~ '
obviously two opposites in interpretation of the
instrument . . Contrast the court1s holding that the proceeds had to be paid
to the named beneficiary with the holding in Burgess v. Murray, supra.
There the court ordered the .proceeds to be paid to the mother rather than
to the insured's sister who had been named as beneficiary.
The court's
reasoning was that the husband's intent could best be carried through by
the wife as the guardian and mother of the children in seeing that the
education of the children was accomplished with the funds.
Murray, supra, at 132-33.
Burgess v.
What the court did was a tacit removal of the
sister as trustee as a part of its equitable powers.
Several different types of problems have arisen under conflicts
resulting from change of beneficiary under the life insurance policy,
generally resulting in a claim by the new beneficiary that no trust was
ever expressed or implied.
In Re 'Koziell's Trust, 412 Pa. 348,194 A.2d 230
(Pa~
1963),was a
situation in which the husband changed the beneficiary of his life
insurance policy from his wife to his sister.
The wife at the husband's
death petitioned the court to require that the sister should establish
either a guardian or a trustee for the children of insufed and wife, and
her request was based on her statement that her husband had named his
sister beneficiary of the policy in consideration of her promise to use
the proceeds for the childrens' benefit
Kozie11's Trust, supra, at 231.
There would never have been a problem at the outset because the sister
said at the time of the husband's death that the proceeds belonged to
the wife and children, so in reliance the wife called the insurance
company and reported the conversation, and they prepared waivers for
the sister to sign.
However, by that time, her avarice had apparently
-19-
taken over, and she refused to sign the papers, claiming the proceeds
instead for herself.
The husband's superior testified at the trial that
he had not known how the situation was to work, but he knew that the
husband had said that he wanted his sister to have the money for his
children.
But at trial
the sister denied having ever disclaimed her
right to the proceeds.
The lower court dismissed the wife's action, finding no agreement
between the insured and his sister that she would be trustee, basing
its decision on a case which said that the trustee's declaration could
not be sufficient to establish a trust.
Koziell 's Trust, supra, at 232.
The Supreme Court of Pennsylvania rejected the decision of the lower
court
for the reason that it found that there was much more evidence
than the so-called statement of the trustee upon which to
rely~
and it
distinguished the case relied upon as one that referred to a parol trust
in reality.
Consequently~
"the court remanded the case as it could make
no judgment on the credibility of the
witnesses~
the determining factor
in the case. "AJready it is" indicated that change of beneficiary problems
as shown by the Koziel; case and the Texas cases, infra~ crop up when the
beneficiary is changed" from a wife or husband or another person very
close to the one intended to be benefited to another person, usually a
collateral relative who does not feel the obligation of carrying out the
insured's wishes.
When this type of thing
happens~
one should look
behind the monies of the beneficiary for evidences of fraud,
deceit~
or
willful misconduct.
Some of the Texas cases present some unusual problems, but
later cases appear to reconcile any difficulties by finding no conflicts
in the authorities at the outset.
One of these cases is Olivares v.
-20-
Olivares, 170 S.W.2d . 575 (Tex.Civ.App. San Antonio, 1943), reh.den.
There the husband named his father ·as beneficiary of a fraternal life
insurance policy, but the father died, and on the husband's death, his
brother told the wife that he wotild collect the proceeds for her and would
then give her a part of the proceeds.
Then the brother claimed the entire
proceeds under a parol trust, claiming that the husband had told him that
if the brother would pay the premiums, he would receive the benefits.
In holding that no parol trust had been established, the court stated the
rule as earlier stated in Garabrant v. Burns, 111 S.W. 2d 1100 (Comm.
App. Sec. A, 1938), that a beneficiary cannot be changed without
written consent . . Regardless of the intent of the parties, where the
beneficiary has not been changed according to the rules of the policy,
the named beneficiary will get the proceeds.
Here, of course, there was
no named beneficiary since the husband had died, but the wife was the
beneficiary by operation of law.
Olivares v. Olivares, supra, at 576.
The court makes statements which are worth recounting in order to
distinguish them with the later cases:
The beneficiary could not be deprived of the proceeds of the
policy by a so-called trust agreement that she had not
consented to, and of which she never heard until after her
husband's death. There are authorities holding that a trust
such as it contended for her by appellee can be created with the
consent of the beneficiary, but we have found no authority
holding that such a trust can be created without the consent
of the beneficiary.
It would be against public policy to have the law otherwise.
The very salutary rule laid down in Garabrant v. Burns, supra,
would be set at naught. It would be just as difficult for a
beneficiary after the death of the insured to combat a contention
that a trust had been created as to show there had been an oral
change of beneficiary, or a change in some other manner not
authorized by the policy or the constitution and bylaws of the
society.
It would perhaps be best to examine the reasoning of this case
in terms of the explanation given by the Court in Ballard v. Ballard,
supra.
The court looked at the provisions of the Texas Trust Act,
Article 7425b-7, stating that trusts of real property must be in
writing, and the Court implied from the exclusion of the language that
trusts in personal property did not have to be in writing.
Further, the
court noted that the Restatement of Trusts, sec. 17 says that a trust in
the proceeds of life insurance may be created by a parol direction of
insured to the beneficiary to hold them in trust where the policy
provides for reserved power in the insured to change the beneficiary.
Ballard v. Ballard, supra, at
8l6-17~
Section 57 says that such a
disposition of insurance proceeds is not testamentary since a present
trust is created, the beneficiary taking his rights as such in trust,
and this independently of an express designation in the policy of the
beneficiary as trustee
Trusts, S 57.
Ballard v. Ballard, supra, at 817; Res. 2d.
The Court goes on to say that these principles have
been restated by the courts in Eaton v. Husted, supra, and Dunn v.
Second Nat'l Bank of Houston, 113 S.W. 2d 165 -(Comm. App. Sec. B.,1938),
but the court
f~lt
that these authorities were all distinguishable from
Garabrant and Olivares in that the former dealt with equitable principles
while the latter two cases dealt with strictly legal principles.
(Ballard v. Ballard, supra, at 817.).
The Ballard court, in
re~evaluating
the Olivares decision,
determined that the court had merely found an invalid executory contract
and did not think that it was faced with a trust situation at all.
However, the sticky problem in Olivares is the court's
relating to the beneficiary.
The court said as quoted
d~scussion
that the
beneficiary had to consent to any trust arrangement with the insured or
-22-
else the trust creation would be invalid.
If this were the rule of
law to be applied in every case, many of the persons intended to be
benefited by the parol trusts already mentioned would probably have lost.
This rule would require that the insured and the beneficiary have a
written understanding and probably to be safe that the trust arrangement
be clearly set out in the life insurance policy itself.
Otherwise, most
of the "trustees" previously discussed would have gotten all the proceeds
for themselves as most of them were collateral relatives of the insured
wh.o preferred to try to recover the proceeds for themsel ves without using
any of it for the insured's wife or children intended to receive the
money.
This ought to serve as one reason among several that an insured
should select a trustee who will not be overtaken by selfish motives such
as a wife or husband.
If the nearest relative of this type is not
available, it would probably be the wisest choice to select a corporate
trustee or at least the insurance company in order to avoid the family
squabbles that inevitably seem to arise.
of situations
.'
ar~
Where the trusts in these types
being proven by parol for the most part, a person who
.
wants to claim as beneficiary would only have to deny any agreement with
the settltir, and a court would be powerless to make any other disposition
since the beneficiary would have had to consent.
The more obvious rule is the one that the courts have adopted.
The Ballard court discusses this, saying that the rule stated in
Olivares was merely dicta since the court found no real trust issue and
that it is contrary to the law as stated by the Texas Supreme Court in
Dunn v. Second Nat'l Bank of Houston, supra.
Ballard v. Ballard, supra,
at 817.
There is one problem that the courts dealing with life insurance
-23-
trusts have never referred to, probably because of the state of the law
at that time, and this is the problem involving fraud on the wife's rights.
Prior to the enactment of the Family Code giving the wife an equal power
of management over the community estate, the husband was considered the
sole manager of the community property of the parties.
While the wife was
considered to be a one-half owner, disposition and management was left
solely to the husband.
Apparently since the law was as it was, the court
in Olivares did not find that there was any fraud,even though the policy
was initially bought with community funds and the wife never knew of the
policy or consented to giving the proceeds to a third party.
It is quite
possible that if the same case were to come before the court today. the
court would be able to find that the husband had defrauded the wife.
Notwithstanding , the fact that the husband's brother paid part of the
premiums, the fact that the wife did not know of the arrangement and the
fact that the policy was intended to be payable to another would be a
certain basis for fraud upon the rights of the wife, and in addition.
---.
the court would also be likely to find that a trust was created
si~ce
the
Olivares holding seems contrary to the bulk of Texas law on the subject.
Another pre-Family Code case presented a situation which also
might be different if decided now .. Volunteer State Life Ins. Co. v.
Hardin. 197 S.W. 2d 105
(Tex. 1946).
There the son was claiming that
he was entitled to share in the proceeds of a life insurance policy
taken out by his father and made payable to a party not his wife.
Plaintiff's father had taken out two policies. one in favor of his estate
and another payable to his parents. and both policies were taken out
during his marriage to plaintiff's mother.
-24-
The father retained the
rights to change the beneficiaries and exercise all the rights under the
policy without the consent of any beneficiary.
Then the father changed
the beneficiary to his wife with the plaintiff as the secondary
beneficiary, and the wife died intestate thereafter with the .plaintiff as
her only heir.
After this occurred, the father changed the beneficiary
again to his two sisters, and at his death, plaintiff claimed a right in
one-half the proceeds to the extent of one-half the surrender value as of
the date of the mother's death.
supra, at 106.
Volunteer State Life Ins. Co. v.
Hardi~;
The trial court determined he had no such rights in the
policy, but the Court of Civil Appeals reversed and gave him the desired
one-half.
On appeal to the Supreme Court, the case was again reversed,
holding that the plaintiff had no rights in the proceeds.
The rationale
of the court was that there had been no intent
to defraud the wife of her rights, and thus, the proceeds of the policy
coul d vest in the named benefi ci ary even though purchased duri ng marri age
presumably with community funds.
supra, at 106.
Th~
Volunteer State Life Ins. Co. v. Hardin,
court further goes on to say:
.. . the proceeds of the policy belong to the person named as
payee, and it becomes property upon the contingency of the death
of the insured in the lifetime of the payee. .Therefore, as it
could not become the property of the husband or the wife during
the lifetime of both of them, it cannot be held to be community
property, and is therefore the separate property of the one to
whom it is made payable. Volunteer State Life Ins. Co. v. Hardin,
supra, at 107.
The contingency of life insurance proceeds has been well accepted,
and the court explains its reasoning by saying that where the insured has
retained the right to change the beneficiary, the named beneficiary
obtains no enforceable · rights in the policy's proceeds until the death of
the insured.
Because the insured has such a right, the named beneficiary
~5-
may properly be divested of this contingent right which cannot vest until
the death of the insured.
probably correct.
Therefore, this part of the Hardin case is
As the above quote illustrates, the policy in the case
remained contingent until the husband as insured died, and he had the
right to change the beneficiary as often as he wished until that time so
that by the wife's predeceasing him, she had not obtained any rights in
the proceeds.
However, this should be strictly qualified in light of the
law as it exists today under the Family Code.
The Supreme Court in
Hardin flatly rejected a case plaintiff argued where the defendant had
claimed that the husband couldn't use community property without the
wife's consent, rejecting it on the basis that Article 4619 gave the
husband the right of sole management of all community property.
State Life Ins. Co. v. Hardin, supra, at 106.
Volunteer
The court further decided that
not only could the son not receive half the proceeds but that the
community estate was not entitled to be reimbursed because husband was
entitled to make this contract of insurance through his rights as
community manager.'-<-,It seems quite probable that in a similar situation,
the Supreme Court woul d probably overrul e thi s theory .
In. order to defeat
the wife's possible one-half interest, it would be necessary to prove that
the wife had joined in making a third party the beneficiary of the policy
and overcome the presumption that the husband had given the policy to
another in fraud of the wife's rights.
Re~ardless
of the outcome on this
score, it also seems certain that there would be a right of reimbursement
to the wife's one-half of the community estate.
Thus far, the cases described have for the most part deal·t with
the life insurance trust with the children or spouse intended to benefit
from the trust, but there is no reason why someone other than an immediate
R26-
family member, or what is called the object of the insured's bounty,
cannot be the intended recipient of the proceeds.
distinctions can be drawn from
t~cases
Several interesting
in which creditors were expressly
intended to benefit from a life insurance policy, and an examination of
some of the cases in this area will better serve to illustrate the
distinctions . ..
In a short and straightforward opinion, the Kentucky appellate
court in Crews v. Crews' Administrator, supra, looked at the facts where
the deceased had bought $1,000 ·in life insurance in order to satisfy
the obligation he owed to one particular creditor, and any residue from
the proceeds was to be paid to the wife.
The administrator of his estate
contested the trust on the basis that the funds should be used to satisfy
other creditors because the estate itself was insufficient to pay all
the debts, but the court rejected the administrator's argument, holding
that the intent of the deceased was clear and had been established by
several witnesses that the wife was to receive any balance.
determined that
·th~
The court
disposition was reasonable since the insured had a
wife and several minor children, apparently believing that the insured's
intent was toput his family in as good a financial position as possible
in the event of his death.
Since the court followed the general rule
that a trust in personalty could be created by parol, the trust was
upheld as to the one creditor and the insured's family.
In a California case, Fahr.ney v. Wilson, supra, the deceased had
taken out a life insurance policy and told his wife and creditors on
numerous occasions that it was his intent to protect the business, a
logging-related business, where he had large debts and a small cash
reserve by the nature of his business.
It was the arrangement that if he
died, the wife would pay his creditors and keep any balance.
The wife,
at the husband's death, tried to keep the proceeds without making the
promised payments, and in a suit .brought by a creditor, the lower court
held that the creditor was entitled to his portion of the proceeds .
In
affirming the decisions, the appellate court framed the issue as whether
the statements and conduct of the deceased showed with reasonable
certainty an intent to create a trust and whether the subject, purpose,
and beneficiary of the trust was sufficiently established as well as
whether the wife accepted a position as trustee.
The court reviewed
the general rules of oral trusts and determined that a trust can be
created regardless of whether the beneficiary is named as trustee in the
policy or whether the insured and beneficiary have an agreement to that
effect outside the policy.
A significant fact the court looked .at .was that
the insured already had a large policy, and it inferred from this that the
policy taken out later was primarily for the benefit of creditors, and
therefore found no problem in awarding those proceeds to the creditors
through the
wife , ~s
trustee.
Fahrney v. Wilson, supra, at 673.
There have been two Texas cases involving creditors as
beneficiaries of insurance proceeds.
In Rape v·. Gardner, supra, a
physician treated the deceased for a terminal illness.
Upon
presentation of a bill for $100, the deceased agreed with the doctor to
pay him the proceeds of a life insurance policy in consideration for
continued medical treatment.
The wife as beneficiary agree.d to the
arrangement but reneged when her husband died.
The court determined that
the wife had breached the trust and said that the creditor was entitled to
receive the proceeds.
Citing the proposition that in :a trust the proceeds
could be established by parol, the court went on to quote from a New York
;-28-
case with approval to the effect that even
tbo~~h~
life insurance policy
is a contingent interest, it becomes vested at the death of the insured,
and the trustee having collected .i t is obligated to carry out the trust
which attaches to those funds.
Hirsh v. Auer, supra, at 398; Rape v.
Gardiner, supra, at 595-97.
Finally, the Supreme Court of Texas in an important case,
Dunn v. Second Nat'l Bank of Houston, supra, faced a more specific issue:
Can the trust in favor of a creditor be shown by parol evidence when the
terms do not specify the particular part of the obligation to be paid,
especially when the entire obligation exceeds the amount of the proceeds?
The court answered that parol evidence had to be resorted to in order to
determine if there was indeed a debt and how much it was, the rationale
being that in order to carry out the insured's intent, it was essential
to look outside the policy itself.
supra, at 170.
Dunn v. Second Nat'l Bank of Houston,
The court says at the outset that in Texas a creditor can
be the beneficiary of a policy but that such creditor is only entitled to
keep the amount' du€ it and will hold the excess as trustee for the estate
of the insured. Dunn v. Second Nat'l Bank of .Houston, supra, at 169.
But
once the court has looked this far outside the written terms of the
instrument, can the court look to see if the insured's aim was to protect
the creditor against particular losses?
In determining that this was
permissible, the court answered that the whole point of designating the
creditor as beneficiary in the first place is to insure against possible
loss, and the insured's intent is only made more certain by the fact that
he has been so specific in designating the purpose of the trust.
The
court, however, qualifies the creditor's right to unrestricted use of the
proceeds by saying that the most likely way that a creditor in this
situation could ever lose the benefit of the trust is through estoppel
or by an innocent purchaser taking the trust res without notice of the
creditor's interest.
However, this did not arise in the case, and the
court did not elaborate on its comments.
Certainly the cases naming creditors as beneficiaries of the
policies do not differ greatly in their facts from those naming family
members as beneficiaries, but there are differences in the way the courts
seem to regard them.
In the first instance, life insurance policies that
have been given to creditors have been given for consideration for debts
or obligations owed to the creditor.
In this respect, it would seem
apparent t~at there is no issue of a gift having been made since a
conveyance made in return for an adequate consideration is more akin to a
bargain rather than an outlay of personal property for which nothing is
expected in return.
There is further no problem involved if the proceeds
exceed the amount owed
t~
the creditor "since, as the Dunn case has
indicated, the creditor is entitled to retain only the amount which will
satisfy the
obli~ation
the insured owed.
This is in sharp contrast to the
majority of cases on life insurance trusts where the person to be
benefited is often a "minor child or wife so that there is at most a moral
obligation or an obligation for support which does not require legal
consideration to be enforceable.
Therefore, it may be easier for a court
to determine the validity of a trust in favor of creditors since the
facts of
con~ideration
make it much closer to being a question of law
not requiring a balance of equities as in the trusts involving family
members.
Another distinction to be drawn from trusts declaring a creditor
as beneficiary is that there is less apt to be a question of fraud upon
the rights of a spouse.
While the cases primarily deal with husbands
who have made life insurance policies payable to a wife, there is no doubt
that in Texas the same rights would apply to either spouse, especially
under the provisions of the Texas Family Code and the recently enacted
equal rights amendment.
Clearly, as already discussed at length, there is
a problem of fraud on the rights of a spouse when the other makes a third
party the beneficiary of a life insurance policy which has been purchased
during marriage with community funds.
A greater number of factors have
to be examined in that situation, resulting in questions of fact that
must be determined by the trier of facts.
The contrary result may be an
almost certainty when a creditor is made the beneficiary of a life
insurance policy.
In any state, the debts owed by the deceased will have
to be satisfied out of his gross estate, and .i n a common law state this
may in some cases severely reduce the estate left to be enjoyed by the
spouse, if any, and other descedants entitled to a part of the estate.
Though it would not work to the same disadvantage in a community property
state such as Texa.s, the decedant IS half of the communi ty debts woul d be
taken from his half of the community estate, and the half of the other
would be left intact for the surviving spouse, though the community half
subject to the debts would likewise be reduced to the detriment of the
takers under intestacy or will.
In either state, by creation of an
intervivos trust, the deceased, during his life has taken assets to
provide a
m~ans
of satisfaction of certain debts by use of proceeds payable
at his death, thereby avoiding the need to take the debts out of property
remaining at death.
A further advantage is that the spouse has provided
a means for relieving a surviving spouse or other family member from
having to pay the debts of the decedent at a time when the financial
resources may be more limited and instead arranging to provide for those
debts at a time when the deceased is able to evaluate his
debt~
and
provide for them before the emergencies arise.
But there is another matter that has come up in several cases
concerning the admissibility of statements made by the deceased to prove
the existence of a parol .trust.
The
n~tural
question that arises is
whether admissibility of such statements is in contravention of the dead
man's statutes in the various states or whether statements are admissible
under the hearsay rules.
Courts which have ruled on this question have
held that the statements are admissible.
An example of this was found·
in the Fahrney case where the defendant was arguing that the statements
made by the decedent were hearsay, but the court held that the statements,
while hearsay, were admissible to show circumstantial evidence of intent
or state of mind at the time the decedent applied for the insurance policy.
A Texas case, Hughes v. Jackson 81
S.W.2rl~
656 (Comm. App. Sec. A,
1935); was primarily concerned with the issue of statements made by the
deceased.
There a policy had been issued to the deceased, payable to the
defendant as trustee with provislon for an alternate trustee to use the
proceeds for the benefit of the children.
The insured retained the right
to change the beneficiary and to assign the policy.
The policy had been
procured at the outset at the defendant's suggestion, and they had
discussed how the proceeds if needed were to be used for education.
The deceased stated to the defendant that the defendant and the alternate
trustee were being listed as trustees on the policy because the insured
knew that her wishes would be carried out.
Before the insured's death,
both trustees paid the premiums, and after the death of the insured, the
-32-
defendant paid the premiums.
company testified
The district manager of the insurance
that insured had made defendant the trustee in return
for a promise to pay the premiums.
By the time of the trial the defendant
had spent a substantial sum for the support and education of one child,
and the other child died, so the survivor and the guardian of a third
child brought suit for one-half the proceeds each.
The trial court gave
a directed verdict to the defendant, but the Court of Civil Appeals
reversed,holding that the evidence as a matter of law showed the creation
of an active trust in the insurance proceeds and that the defendant was
·the trustee with practically unlimited discretion.
The appellate court
also found that when the mother died, each child had become vested with
a one-third beneficial interest in the proceeds, and when one child died,
his two sisters as his heirs took his share free of trust.
The
Commission in a partial reversal determined that the Court of Civil
Appeals' findings as to the trust and trustee could only be true if the
testimony of the defendant and the manager were taken as true as a matter
of fact by
the '~ury,
but the .court refused to do so.
It determined as a
matter of law that because the defendant was an interested party testifying
to conversations with a person then dead that the jury should have weighed
his testimony and passed on his credibility.
658; and Koziell's Trust, supra, at 232.
Hughes v. Jackson, supra, at
As to the manager, the court
determined that because there had been eight years since the original
conversation with the insured had taken place and because the manager
could have been regarded as a party friendly to the defendant that the
jury should also have passed on his credibility.
Therefore, the court
was saying that the statements of these two were admissible, but because
of the nature of their possible interests in the outcome, the court was
-33-
unwilling to accept their testimony without first giving the jury an
opportunity to pass upon credibility and attempting to view the evidence
in a' light favorable to the plaintiff. ' The court went on to give guidance
to the jury and the court on remand, say.ing that if the defendant was
believed by the jury, then this would establish an active trust with
discretion in the trustee to use the funds as he saw fit and said further
that he was entitled to spend the money on the children as a family and
was not required to expend the same amount on each child, the only limit
on his power being that he was only to expend the funds for the children
. to avoid a breach of trust duty.
In Ballard v. Lance, supra, the daughter of the deceased/insured
was allowed to testify to the statements made to her by the insured
which established a trust in all the grandchildren with the two named
grandchildren as beneficiaries/trustees.
The court held that these
statements were admissible because the daughter was not testifying in her
own interest. Even
court looked
at ~~he
though she was directly related to the deceased, the
legal relationship under the alleged trust and found
that the daughter, related also to the beneficiaries, was not a person
who had an interest in the trust res and was therefore entitled to testify
to her knowledge of the insured's intent.
In the Texas case, Ballard v. Ballard, supra, involving the parol
trust between a father and his minor daughter, the issue was raised as
to whether the defendant/brother's statements to his attorney and others
to the effect that he knew he had been made
. to care for the daughter were admissible.
benefici~ry
with instructions
The court looked at textual
authorities which have stated that most courts will admit statements of
this sort on a theory of privity of title between the insured and the
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beneficiary, though it is argued that they should not be admissible
because the beneficiary is not taking from or under the insured, but
the court in Ballard simply dismissed the argument as stretching the
technicalities of privity to a point of unfairness.
The court went on to
review the Clausen decision and stated that a single declaration of an
insured is competent alone to engraft a trust on the proceeds of a life
insurance policy.
· Ballard v. Ballard, supra, at 820.
The court's
reasoning wa:s that equity wil] prevent someone in this trustee's position
from getting a windfall and unjust enrichment because the trustee cannot
question his role and escape his fiduciary duty by invalidating the trust
on the basis of an inadmissible declaration by the insured.
Thus, there appears to be no evidentiary obstacles to the
admission of a statement made by the insured to another person regarding
his intent as to the proceeds of a policy.
On the one hand, if it is
hearsay, it is admissible to show state of mind, and in the wills and
trusts area the courts are always primarily concerned about enforcing the
intent of the -,-testator or trustor.
On the other harid,if it is not
hearsay, there is no admission problem anywai, and the court may be
entitled to examine the legal relationship between the parties in order
to determine if one is testifying in his own interest or is making a
declaration against his own interest.
Therefore, while it is an issue to
be considered, it is not one that has caused severe problems in resolving
the question of whether a trust exists at all.
In any consideration of trust problems, it is essential to look
at the role of the trustee and the applicable standard as well as other
problems such as notice; removal, and enforcement of appropriate remedies.
Without doubt, the general rule is that a trustee is held to a
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high standard of honesty and accountability, and a trustee must be
careful to exercise his duty strictly within the limitations of the trust
terms~
However, depending upon the individual circumstances, courts have
specified the rules more exactly in order to conform with the many
situations in which questions and conflicts can naturally arise.
This
is the importance of court supervision over a trustee at the outset.
First, must a beneficiary always be told that he is being made
beneficiary only to act as trustee for another?
The clear majority of the
jurisdictions have stated that notice to the beneficiary is not necessary
to impose a trust.
In dicta as already mentioned, the Olivares court in
Texas said that it would be impossible to create a trust without knowledge
by the beneficiary that he was not given both legal and equitable title,
but this proposition was overruled later by the Dunn court.
There the court
held that the bank, which did not know 6f the insured's intent to use
the proceeds in a certain way was not required to know or
creation of a para1 trust.
at 171.
Other~ ~ourts
cQn~~nt
to the
Dunn v. Second Nat'l Bank of Houston, supra,
have stated the same principle, and the Massachusetts
court in Cooney went one step further to distinguish the situation where
the settlor makes himself trustee for another, thereby keeping legal
title in himself.
In such a case, the court said it would be necessary
to give notice to the beneficiary of .the trust but that it is unnecessary
in cases where the settlor divests himself of legal title by making '
antoher the trustee.
Cooney v. Montana, supra, at 207.
The
Pennsylvania Supreme Court has also held that notice to the trustee is
not essential, stating that if the trustee does not wish to accept the
obligations placed on him, he has the option at the time he learns of the
trust to refuse to serve before having anything to do with the trust
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res.
Donithen v. Ind. Order of Foresters, supra, at 143-44; and Koziell's
Trust, supra, at 232.
As with the notice issue, the courts in determining what standard
will govern the trustee's actions have had little difficulty.
The
Ballard court in Texas has said that a trustee cannot question his role
as a fiduciary in collecting the insurance proceeds for the intended
recipient, and the court set out the standard that the court must look
at all the evidence in the light most favorable to the plaintiff and
that such evidence must be clear, satisfactory, and convincing before
it is submitted to a jury who is entitled to rest ·upon a mere preponderance
of the evidence.
Ballard v. Ballard, supra, at 820.
Also, in the Cooney
case, supra, the court . determined that the sister had a duty, once the
trust had been established, to show that she had executed the trusteeship
thus far with reasonable skill, prudence, and judgment, including a duty
to keep accurate records.
It will be recalled that this was the case
where the policy produced twice the amount expected because of the double
indemnity provi si.~Jn and the sis ter had only set as i de the amount her
brother had anticipated.
The court said that its duty was to look at
all the circumstances, the existing relations, and feelings between the
parties and that in Massachusetts the standard was that a trustee is held
to accountability not only for the capital but for the income as well.
Cooney v. Montana, supra, at 208-09.
In one of the few cases not finding a trust, the Second Circuit
in Cullen v. Chappell, supra, determined that the defendant had not done
enough to constitute herself as a trustee and said that she had acted
merely as a volunteer for her father to pay part of the proceeds to his
second wife and had not received any consideration to support the
-t-37-
executory promise
Cullen v. Chappell, supra, at 1018.
The court said
that while one might intend to act as a trustee, such intent does not
have to be expressed, and absent any steps to bring it into existence, the
evidence will be insufficient to charge a person as a voluntary trustee.
In looking at the facts of the case, the court studied a letter the
defendant had written to the plaintiff, asking how the plaintiff preferred
that payments be made, but the court further said that the defendant was
evidencing no intent to subject the proceeds of the insurance the subject
of a trust.
Further, the trust could not be enforced by the court because
there had been no consideration to validate a contract.
Apparently the
court did not regard the half of the insurance proceeds which the defendant
was to receive as a consideration from her father for seeing that the
other half went to the second wife.
To make its position even more clear, the court went on to say
that even if the defendant had intended to · create a trust arrangement, it
could not be upheld because the insurance company refused to pay to
anyone but the named beneficiary, meaning that the only fiduciary
relationship existing was that between the company and the defendant,
something akin to a debtor-creditor relationship, a minority approach to
the problem.
Finding that there was no intent to create a trust, it was
further found by the court that the defendant had not charged herself as
a trustee as there was no arrangement to make present payments to the widow
because the plan was simply to forward the checks as received from the
company.
Finally, the court determined that there was no res to be held
in trust since the most that existed was a contract binding upon the
insurance company to pay the defendant, at most amounting to a promise to
pay in the future presently nonexistent proceeds.
~J8-
Cullen v. Chappell,
supra, at 1018,
but the impossible statement to reconcile is that the
court then says that once the trust has been set up, lack of consideration
is irrelevant, and the trustee is bound to perform.
Under the courtls
reasoning, especially based on the facts it had before it, consideration
was essential, and it seems difficult to see how the court could ever find
that the trustee had any duties whatsoever unless it were an obvious
situation such as in the case of a creditor being the beneficiary.
The
case somehow leaves one uneasy and with the feeling that the insuredls
desires were totally disregarded for the _sake of form.
As already
stated, this is apparently not · the reaction of most jurisdictions in this
situation.
The Texas cases discussing the standard of conduct of a trustee
are much more reassuring and definite.
In Texas, courts follow a
rebuttable presumption that where a trustee is named as a direct
beneficiary under a trust, it is presumed that the trustee accepts the
trust unless evidence is offered showing a disclaimer of the trusteeship.
(Lange v.
Houston ~ Bank
and Trust Co., 194
S.W.2d~
797 (Tex.Civ.App.-- ·
Galveston, 1946) reh. den. · This would seem to be a much more logical
approach to determination of the existence of a trusteeship since it
properly places the burden of rebutting the presumption upon the party
who is the alleged wrongdoer.
and it could seemingly
b~
Acceptance does not have to be formal,
implied from such things as acts
and conduct.
The best statement in Texas of what a trustee is held to was
stated by a Court of Civil Appeals case quoting a Missouri court:
Whenever a person comes into the possession and control of the
property of another, or in which another has an interest, he
becomes, with reference to that interest, a trustee, and is
charged by law as well as by good morals to exercise such
control with due regard to the interests of the beneficiary.
ii9-
Sometimes the trust is implied by law, but often the relation
arises out of contract between the parties themselves. The
possession and control is thought to give the trustee such
opportunities for oppression ~nd wrong in the management of the
property as calls for the closest scrutiny of his acts, and out
of this arises one of the most important branches of equity
jurisdiction. Pounds v. Jenkins, 157 S.W. 2d 173," 178 (Tex.
Civ. App.-- Texarkana~ 1941), r~h: "den.; and "Dibert v. D'Arcy,
248 Mo. 617,154 S.W. 1116,1125.
There can be no doubt but that Texas regards the position as trustee as
a very critical one as it affords ample opportunity for abuse and
mismanagement so that a court is virtually obligated to see that good
judgment is exercised for the primary benefit of the trust beneficiaries.
The court went on to say that there was no requirement of an actual trust
or fiduciary relationship but that such a remedy could be enforced
whenever the property of one was wrongfully taken by another.
This is
almost tantamount to finding a constructive trust and would be most
useful where the named beneficiary was a minor or incompetent and another
person had to administer the funds
rath~r
than the situation generally
found where proceeds have been left to the adult or other similar person
as named beneficiar.y where it was clear that the administration was to be
for the benefit of another.
Yet there is certainly the remedy of removal of an acknowledged
trustee who in some manner breaches the duty, and this has been done under
several circumstances.
In Haberland, supra, it was argued by the plaintiffs
that the defendant had made a number of inconsistent statements regarding
his use of the insurance proceeds such as that he was to use the funds for
the children, that he was to hold the funds during their minority and pay
over to them at their majority, and that the funds were expendable for
his own benefit or for a trip to Mexico.
The Third Circuit, upon looking
at his conduct found that there was no need to remove him as trustee
:
as there had been no conduct warranting a finding of failure to exercise
proper care; however, the court was somewhat suspicious of his potential
in view of his inconsistent statements, and the court held that because
the trustee was in Ohio while the entire trust res was in Pennsylvania,
that a corporate trustee in Pennsylvania should be appointed to keep
accounts and assume equal responsibility with the trustee.
So implicitly,
the court found a remedy inherent in the circumstances, and instead of
removal, it appointed another trustee which was more reliable and which
could serve as a check on the individual trustee, thereby avoiding the
problems which could easily have necessitated a removal at a later time.
The Rosen case makes it clear that a trustee cannot be removed
merely because it is suspected he will breach his duty.
As stated, the
Haberland court found an alternative remedy because of the distance
between the trustee and the res, but in Rosen, this advantage was
apparently not present . . There the father of the insured who was
claiming the proceeds was considered by the plaintiffs to be hostile
toward the plaintiffs so that they were afraid that they would not
receive the benefits under the policy.
The court in effect held that
probability could not govern the trustee since the function of the court
is to step in and render an equitable remedy only when there is no other
alternative.
They therefore held that the father had not yet been
established as hostile trustee, and if such
ev~r
were the case, the court
would give the remedy of a new trustee as a part of its supervisory role
over the trust.
Rosen v. Rosen, supra, at 73.
Similarly, the Cooney court looked at the trustee there and
determined that there had been no hint of dishonesty,
b~t
it also found
that the trustee had shown a decided lack of interest in her wards,
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especially since the proceeds she had set aside for them from the double
indemnity award were sitting in a safety deposit box in cash where it
was earning no interest, contrary to the trustee's duty in Massachusetts
already discussed, and the court, on the reasoning that this using of the
funds were not what the insured had intended, removed the trustee and
remanded to allow the lower court to select a new trustee.
demonst~ated
Hence, it was
that a trustee could be divested of the almost sacred
position by a failure to act in a certain way, even in possible good
faith and absent wilful wrongdoing and fraud.
Cooney v. Montana, supra,
at 209.
In a recent Civil Appeals case, the Texas court looked mainly
at the issue of what responsibility a trustee was held to and under
what circumstances a removal could be justified.
The court, in finding
that the lower court had not abused its discretion in removing the trustee,
based its decision first on the nature of the interest the trustee was
responsible for, saying that the trust fund had to be protected, and if
necessary the trustee co·uld be removed in order to meet that end, finding
its authority to so remove the trustee under Article 7425b-39 of the
Texas Trust Act.
The court then went on to state that a trustee could
violate his duty in a number of ways including bad faith, by intentional
violation whether in good faith or negligently done, by mistake, by
intended or attempted appropriation, or by repudiation of the trust.
Brau~v.
Bigham, supra, at 579.
The court found the violation in Brault
primarily in the facts that (1) the evidence established that the defendant
had refused to place the funds in a bank account in trust for the
children and (2) the defendant was suing to recover the funds personally.
Therefore, it is evident that in accepting the position as trustee
-42-
(or in failing to disclaim such trusteeship clearly) a trustee is charged
with a strict exercise of care since a mistake made even in good faith
and with good faith intentions can result in a removal.
There are good policy reasons for this strict a standard, and
this is well illustrated by an example which happened in the Lubbock area
but which never came to court . . Apparently when the parents of certain
children died, their grandfather was left as trustee of the property,
and things went well for a while until the trustee began investing the
property and inevitably lost everything that was to have benefited the
children.
Very often no remedy is sought in a case such as this because
a close relative who is expected will guard the welfare of the beneficiaries
is not held accountable for such losses.
The moral of this kind of story
is that one should think several times before making a family member the
trustee for other family members since there is often a reluctance to
bring lawsuits within families, especiaily when grandfather or aunt or
uncle "meant well".
apparent · that
The problems can be insurmountable, and it is
the ~ cases
which have gone to court, often through a guardian,
have e.nded in harsh feel i ngs between fami ly members that perhaps otherwi se
would have always remained close. impersonality can be a great asset in a
trustee when specific purposes for certain beneficiaries such as minors
are contemplated.
The best express way to create a trust in the proceeds of life
insurance is accomplished by compliance with .Section 58(a), Texas Probate
Code, validating a pour-over bequest from a will to an existing trust.
The statute provides that a testator may devise property to the trustee
of any trust under the terms of a properly executed will, and the trust
must be in existence at the time such will is executed.
-:43-
The trust itself
does not have to be an active trust as the statute specifically provides
that the term IItrust
ll
includes an unfunded life insurance trust.
However,
there is a proviso that the terms of the trust must be set out in a
written instrument and identified in the will, but it does not matter
that the trustor retains the power to amend, revoke, modify, or terminate
the terms of the trust or the trust itself.
The trustor is entitled to
revoke the trust before death, and any pour-over in the will simply lapses
at death.
The reasons for utilizing a pour-over provision have been set out
in commentaries on the statute and provide several viable justifications
·in estate planning.
By setting up a trust which will be completed by
the will, the settlor gains an opportunity to see whether the trust will
work and will be able to select his trustee and determine if the trustee
will be satisfactory in carrying out the wishes of the settlor.
Another
reason that has been argued is that a pour-over provision can avoid
publicity concerning family business.
questionable
a large
unl~ss
How this works seems rather
it refers to action putting property aside where such
estate is involved as to be well known to others in the community.
Perhaps another argument would be that the testator could successfully
put certain property beyond the reach of everyone but the named trust
beneficiary without having to bring the same property through the estate
at death.
There is also the added advantage of reduced costs of administration
The life insurance trust can be set up completely during life, yet it
will have no res to be governed and will cost the settlor nothing until
the time it is to be distributed since most corporate trustees would
probably make no charges as long as there were no responsibilities yet.
The addition of Section 58(a) has served to codify existing
-.44-
law and has not caused any serious problem in practice as evidenced by
the fact that no cases have been decided since the statute was added
to the Probate Code.
doctrines:
The section covers two previously existing
The doctrine of incorporation by reference and the doctrine
of facts of independent or non-testamentary significance.
The incorporation
doctrine simply emphasizes that the instrument, i.e. the life insurance
trust instrument, is simply incorporated into the will even though not
executed with the same formalities but is properly identified within
the will.
The independent facts doctrine requires that facts outside
the will disposition be examined, and it is the fact of the existing
trust that is the main consideration.
The trust does not have to exist
at the time of the execution of the will so long as the trust exists
before the testator's death.
The only aspect here not included in the
statute is that the trust must be in existence at the date of the
execution of the will, but as earlier discu~sed, th~ statute continues
to operate and the trust be effective even though the trustor retains
power to
change ;~~e
trust in some way.
Therefore, the statute appears
to have gone a long way toward solving'prob1ems which existed under the
use of the two doctrines, especially when trusts were revocable
and~changes
were made in the trusts before or after the execution of the will,
involving validity of the
~hanged
trust, the problems being more acute
where a jurisdiction recognized only one of the two doctrines.
However,
the statute such as Texas has, has been adopted in a number of states,
hopefully resolving some of these issues before they arise.
Certainly
the life insurance trust has been a device commonly used in Texas as
well as in other jurisdictions, even though its use has generally not been
-45-
done under the auspices of a statute, a trust document, or even a will
but rather through oral statements to another declaring an intent to
create a trust in the proceeds of the policy.
Obviously, the problem
has been simplified in Texas by the statute- 58{a) -as well as provisions
of the Texas Trust Act, Art. 7425b-7, declaring that trusts may be
created in writing or orally through promise.
It seems evident that such
an expression in the law was warranted since it is the type of thing
which a person concerned about the welfare of family members in particular
will automatically turn to, and it seems the logical inference that
fewer cases will arise now that these laws are codified, and certainly
those that do arise will not be decided any differently than those in
the past.
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