On September 23, 2019, Mouzon Bass, the president of Ebenconcepts, Inc., which was the Debtor's former employer, assigned to the Debtor a whole life insurance policy with a cash value of $814,917.00 in consideration for the Debtor's shares in Ebenconcepts. At that time, Ebenconcepts was the beneficiary of the whole life insurance policy.
Subsequently, on December 13, 2019, the Debtor filed a Chapter 11 bankruptcy, which was later converted to Chapter 7. The asset at issue in this case was a whole life insurance policy, with, as of the date of the petition, the Debtor's wife now named as the beneficiary . Pursuant to N.C.G.S. § 1C-1601(a)(6) and N.C. Const. Art. X § 5, the entire policy was claimed as exempt.
With an objection to the exemption based on the propriety of a re-designation on the even of bankruptcy separately pending, the Trustee also sought to characterize the re-designation of the Debtor's wife as the beneficiary as an avoidable transfer pursuant to 11 U.S.C. §§ 548 and 550, as well as N.C.G.S. § 39-23.4(a)(1)-(2), -23.5(a).
Starting from Russell v. Owen, 165 S.E. 687 (N.C. 1932), the bankruptcy court held that "until after the death of the debtor, the beneficiary does not have a property right, but only a mere expectancy." The bankruptcy court, however, recognized that the question was not whether the beneficiary had a property interest, but whether the Debtor had transferred a property interest by re-designating his wife as the beneficiary. Here the Debtor had a right to change the beneficiary and despite the exercise of that right to re-designate the beneficiary, the Debtor still retained that right. In fact, that right to change the beneficiary became an asset of the bankruptcy estate, but because the estate was not depleted of assets there was not transfer. (The bankruptcy court astutely points out that the Trustee seeks to conflate "the concept of what constitutes property of the estate with what property may be exempted from the estate.")
That the right to change the beneficiary of the whole life insurance policy was an asset of the bankruptcy estate and would allow the Trustee to designate some other party than the Debtor's wife as the beneficiary, would not deprive the debtor of his exemption, since those fix as of the date of filing of the bankruptcy.
With a determination of whether the re-designation of the beneficiary of the whole life insurance was appropriate exemption still pending, the utility of this for exemption planning with regards to not only whole life insurance policies, but arguably transformation of non-exempt assets into exempt assets without a dollar limitation, such as real property owned as Tenants by the Entireties, will have to wait.
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