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
an annuity.


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

                                                                                               those protections.


                                                                                                    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.

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