Saturday, January 28, 2006

Chawla Update

In March, I commented on a decision by the U.S. District Court for Eastern District of Virginia, Chawla v. Transamerican Occidental Life Insurance Co. (February 3, 2005). In that case, the Court, gratuitously I thought, opined that the that a trust lacked an insurable interest in life of the grantor of the trust. This portion of the opinion has caused much gnashing of teeth among members of the estate planning community because insurance trusts are a commonly used estate planning mechanism and the opinion, if upheld and generally applied, would effectively prohibit their use.

On Tuesday, the Chawla case will be argued before the United States Court of Appeals. There are also two companion bills pending before the Maryland General Assembly, H.B. 271 and S.B. 300 that would remove any cloud on insurance trusts that has been cast by the opinion. If passed, the bills would modify Maryland Insurance Code Ann. Sec. 12-201 and would be apply to all trusts existing before, on, or after June 1, 2006, regardless of the effective date of the governing instrument under which the trust was created, but only as to life insurance policies that are in force and for which the insured is alive on or after June 1, 2006. In other words, the proposed statutory amendment will not affect the outcome of the Chawla case itself.

Hat Tip: Robin McDaniel Hough.

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