Should You Take Out Life Insurance on an LLC Member?

If you own or co-own a Washington business, you might consider taking out a life insurance policy to protect that business in the event of your sudden death. For example, many Washington limited liability companies take out life insurance policies on their members. This can provide liquidity to buy out the member’s interest in the LLC from their estate after their death.

Insurance Company Caught Between Policyholder’s Widow, Business Partner

Of course, if you choose to purchase a life insurance policy on yourself for the benefit of your LLC, make sure you do so with the full knowledge and consent of your spouse. Otherwise, you may end up creating additional legal problems following your death. A recent decision from the Washington Court of Appeals, Federated Life Insurance v. Joanis, provides a cautionary tale in this regard.

Two men with the last names of Joanis and Herring, respectively, were members (co-owners) of a limited liability company. Herring purchased a $1 million life insurance policy naming himself as the insured, the policy owner, and the payor. Herring named Joanis as the sole beneficiary of the policy. Herring subsequently transferred ownership of the policy to Joanis, and the premiums were paid by the LLC.

Herring died in October 2022. His widow was named the personal representative of his Washington probate estate. A few months after Herring’s death, Joanis sought to collect on the life insurance policy. The insurance company initially refused to pay, invoking its right under the policy to review the “truthfulness of some of Mr. Herring’s statements in his application.” The insurer ultimately determined there was nothing wrong with the application and it had to pay out the death benefit.

While this review was underway, however, Herrin’s widow claimed she was entitled to at least some of the life insurance proceeds. She alleged that her husband used marital funds to initially purchase the policy without her knowledge or consent. As such, she maintained that if any premiums were paid using community funds, the policy should also be treated as part of the marital community.

The widow threatened to sue the insurance company if it made a distribution to Joanis. The insurance company responded to this threat by filing what is known as an interpleader action. This is essentially a legal proceeding where an insurance company deposits the contested amount of a policy with the court and then asks a judge to decide who is entitled to the money. This way, the insurance company does not get sued for favoring one claim or the other.

Indeed, a federal judge granted the insurance company here just such relief. The insurer deposited $500,000–representing half of the original policy–with the court. The judge then dismissed various legal claims made by Joanis against the insurer. The judge did not, however, resolve the underlying dispute over whether the widow was entitled to part of the insurance proceeds, as that is being handled in separate litigation before a Washington probate court.

Contact a Spokane Estate Planning Lawyer Today

One lesson from this story is that you cannot separate your personal estate planning from your business estate planning. You need to make sure that your family–and especially your spouse–is aware of and on board with your plans. An experienced Spokane estate planning attorney can help make sure you are all on the same page. Contact Moulton Law Offices, P.S., today to schedule a free consultation. We serve clients throughout the Spokane, Kennewick, and Yakima area.

Source:

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