My Annuity Cannot be Taken by
Creditors if I am Sued
This compelling proposition has been promulgated by a
contingent of insurance agents for a long while, often using
the anecdotes of O.J. Simpson moving to Florida so that his
judgments could not touch his annuities in that state, or
Kenneth Lay of Enron fame sheltering his annuities in
Texas to avoid all the legal fallout of his evil financial dealings.
But, like every sizzle in a product offer, the laws regarding
bankruptcy protection for annuity policy holders are less black
and white and more nuanced than simple 100% pure creditor
protection. In fact, the laws come down down namely to
2 factors: what state the policy owner resides in and what
state the annuity is in.
Both states referenced here have different meanings.
The first state references which of the 50 states the policy
owner resides in.
The second state references whether the owners annuity is in a
state of deferral or a state of annuitization.
So let's get started on the nuances of creditor protection in
And remember, this writer is not an attorney, but an insurance agent trying to explain this issue as he has
learned from his own study and experience. So I am not giving legal advice.
However, according to estate planning attorneys Gideon Rothschild and Daniel S. Rubin, the general idea behind potential creditor protection for annuity policy owners is the philosophical belief that an annuity represents a portion of a family's vital financial livelihood and, as such, should be protected (to a degree) from creditors to avoid full destitution and thus making the family a literal burden of the state. In this same spirit, these laws work much like the state homestead laws which were invented to save homeowners from being kicked out of their homes by creditors.
Currently, financial assets such as IRA's and other
retirement plans have near coast to coast creditor
protection because of the ERISA ACT which granted
Annuities, on the other hand, may have some
creditor protections, but these protections are
highly subject to state laws as well as specific
jurisdictions of the court. The laws can also apply
differently to your personal circumstances as well
therefore you must study the laws of your own
state of residence in order to determine any potential protections you may have.
There are 4 states, those being Connecticut, Massachusetts, New Hampshire, Virginia that have ZERO creditor protections for annuity policyholders, according to Boston estate planning attorney Alexander A. Bove, Jr.
Conversely, there are 5 states : Michigan, Florida, Texas, Colorado, Illinois that have unlimited protection for annuity policy owners.
And all the rest of the states fall somewhere in between.
California's Civil Code, for example, has limited protections in the amount of $ 9,700 for policy owner, but, like many states, also provides for exemption amounts deemed reasonably necessary for the sustenance of the debtor, which could include therefore higher amounts.
It is also important to note that in most cases, the debtor will always have to show the bankruptcy judge how the annuity is reasonably necessary. Creditor Protection Laws are not absolute, even in those states that offer unlimited protection. Fraudulent Conveyancy laws decipher whether bankruptcy applicants have intentionally hid or disposed of assets in order to receive bankruptcy protection and even a perfectly structured annuity contract obtained in an exempt state may be disallowed if fraudulent conveyance is determined.
Also, keep in mind, moving to a state that offers superior creditor protections for annuities when you already have a pending bankruptcy or debt issue may also constitute fraudulent conveyancy and invalidate any credit protections that exist in the new state you moved to. Speak to a bankruptcy attorney, of course, if this a serious matter you are considering.
Annuitized Annuity Protection
That second state of the annuity (not the geographic
one) references an annuity which has been annuitized,
also known as converted to a series of systemic payments.
In cases such as this, the original principal no longer exists
as an asset of the debtor, rather, it is simply a right to
receive a payment (generally over a lifetime), much like
an account receivable. Since there is no sizable asset for
a creditor to therefore seize, the most that that creditor
could potentially assume would be that payment itself.
But once again, the reasonably necessary laws of that
state you reside in may allow you to keep some, or
perhaps all of that payment. Once again, check with
your legal counsel.
So, like every sales pitch, the fine print regarding creditor protection laws may or may not be as useful as it sounds. Often your original asset can be improved upon for creditor protection purposes if you do buy an annuity. However, the amount of the creditor protection you will actually receive depends upon the laws of your state and your specific circumstances.