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Click here for the full text of this decision FACTS:Husband and wife Charles and Carol Trautman got into financial trouble. In 2004, Charles surrendered a whole-life insurance policy that he owned, a policy which insured his life with the death-benefit payable to Carol. The policy had a gross cash surrender value of about $95,000 and an outstanding loan balance of about $67,000, yielding a $27,913 difference. Charles received a check for that amount but did not cash it. Soon after, the couple filed for bankruptcy. After electing to exempt property from the estate under Texas law rather than federal law, the Trautmans listed as an exemption the uncashed check. Bankruptcy trustee Marsha Milligan objected. After a hearing, the bankruptcy judge denied the objection, upholding the exemption. Milligan appealed, and the district court reversed. The Trautmans appealed. HOLDING:Affirmed. Texas Insurance Code �1108.051, the court stated, applies to any benefits, including the cash value and proceeds of an insurance policy, to be provided to an insured or beneficiary under an insurance policy. Section 1108.051 further states that such benefits “inure exclusively to the benefit of the person for whose use and benefit the insurance . . . is designated in the policy” and are fully exempt from: “garnishment, attachment, execution, or other seizure”; “seizure, appropriation, or application by any legal or equitable process or by operation of law to pay a debt or other liability of an insured or of a beneficiary, either before or after the benefits are provided”; and “a demand in a bankruptcy proceeding of the insured or beneficiary.” With whole-life policies, the court stated, the owner pays the insurer more than the cost of premiums. The excess money goes into a sort of interest-bearing savings account, against which the owner can borrow money or pay the premiums if he ever chooses to pay less than the regular premium. As long as the policy exists, if the insured dies, the beneficiary receives a death benefit. The owner can also withdraw the entire cash value, surrendering the policy. Under Texas law, the court stated that “money paid to the debtor- beneficiary of a term-life policy � as long as it can be traced to that source � is exempt” from inclusion in the bankruptcy estate. But the court found in a question of first impression in Texas that money paid to the owner of a surrendered whole-life policy is not exempt. Section 1108.051, the court stated, protects “benefits.” Charles argued implicitly that the money went to him as a final “benefit” payable to him as the insured, but the check went to him as the owner of the policy, not the insured. The court concluded that the surrendered check did not go to the beneficiary but rather the owner. In sum, the court held that when the owner of a whole-life policy surrenders the policy, the funds are not protected by �1108.051. Exempting all money traceable to a surrendered whole-life policy would allow people to use such policies merely to avoid creditors, the court noted. OPINION:Higginbotham, J.; Higginbotham, Wiener and Prado, JJ.

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