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Scenario: The first settlor of an AB trust in California dies leaving life insurance proceeds to his surviving spouse as beneficiary. These assets are not held in trust, and upon the death of the surviving spouse these proceeds (under $100,000) would be distributed immediately to the beneficiaries (settlors children). The surviving spouse sells some stocks held in her survivors trust and deposits the proceeds into the same bank account with the life insurance proceeds. The stock sales proceeds would distribute under the terms of the trust after the death of the surviving spouse. The funds are now co-mingled and the surviving spouse uses this bank account to pay for all her needs. When the surviving spouse dies how is it determined whether the funds remaining in the co-mingled account are from the life insurance policies or from the stock sales? Is there a general rule for this?
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If the primary beneficiary of the life insurance policy was the widow, then she can do whatever she wants with those proceeds. Only if the trust is named as the primary beneficiary of the policy would the widow need to keep the proceeds separate from her other assets. The trust itself could remain revocable, but a typical "AB trust" does divide into shares at the time of the death of the first spouse to die. The precise manner in which those assets are to be divided and then distributed is determined by the terms of the trust instrument.
Assuming the beneficary of the policy was the widow, it is her estate plan that would govern where any remaining assets are distributed; the policy proceeds belonged to her, and she could commingle them with any other assets that she owned. If those proceeds, or a portion of those proceeds, are determined to belong to a trust that was made irrevocable upon the husband's death, then there are a number of ways to segregate what should have been done. Considering the size of the policy ($100,000), it probably would make sense for the parties to come to some agreement among themselves as to how this should be done.
Answered on Sep 07th, 2013 at 5:25 PM