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Do Annuities Offer Creditor Protection?

annuities creditor protection

Annuities are contracts between you and an insurance company. As the policyholder, you are entitled to certain guarantees provided to you by your life insurance company.

You can enjoy guaranteed income for life, guaranteed growth, guaranteed protection against market risk, or a guaranteed death benefit, among many other benefits.

Annuities also give the benefit of tax-deferred growth until you start withdrawing money from them. Not only that, annuities can also provide you with certain protections against creditors.

However, this helpful protection characteristic of annuities can vary by state. Here's a quick look at how annuities can offer various creditor protections if you are concerned about the exposure of your assets or money.

State Exemptions for Annuities

In some states, annuities are unconditionally exempt from seizure by creditors or bankruptcy court. States such as Florida and Texas have laws that prevent creditors from seizing any money that is held inside an annuity or cash value life insurance policy.

These two states maintain these statutes in order to protect the large number of retirees who live in those states and depend upon the income from annuities to cover their living expenses.

As for the rest of the states in the union, exemption from seizure can vary from one case to another depending upon the circumstances. Some states offer limited or no creditor protection for annuity contracts.

For that matter, an annuity that qualifies in one state might not be eligible in another state due to one term. Those terms can include whether the annuity has a qualifying event that triggers eligibility or if the series of payments from the annuity exceed a specified amount by that state’s laws.

Florida and Texas Have Strong Annuity Creditor Protections

Here we will look closely at Florida and Texas, where annuities are largely exempt from seizure by creditors under any circumstances.

Here is a direct quotation from Florida's state statute 222.14:

"Exemption of cash surrender value of life insurance policies and annuity contracts from legal process. The cash surrender values of life insurance policies issued upon the lives of citizens or residents of the state and the proceeds of annuity contracts issued to citizens or residents of the state, upon whatever form, shall not in any case be liable to attachment, garnishment, or legal process in favor of any creditor of the person whose life is so insured or of any creditor of the person who is the beneficiary of such annuity contract, unless the insurance policy or annuity contract was effected for the benefit of such creditor."

This statute clearly states that all money that is housed inside any type of annuity contract (fixed, fixed indexed, or variable) is unconditionally exempt from any form of seizure by creditors.

For this reason, many medical professionals and some other high-income earners, place all of their non-qualified investments and cash (outside of IRAs and employer-sponsored retirement plans) in annuities. They may keep some liquid cash in the bank, but for many of them that is it.

Texas has a similar set of statutes pertaining to exemption from creditors for annuities that are about as strong as Florida's. To put this in perspective, O.J. Simpson was living off of money that he had put in annuities before his most recent incarceration.

The plaintiffs in the civil suit that was filed against him went after a great deal of his money, but not what he had inside his annuity contracts.

Federal Bankruptcy Exemptions for Annuities

There might be some federal exemptions in matters of bankruptcy for annuities. But it depends on the circumstances. You will want to check with your CPA or attorney on these matters as well as guidance for your personal situation.

Irrespective of whether you choose state or federal exemptions for annuities, your annuity can be exempted if it meets qualified retirement account requirements as set forth by the IRS tax code, according to writer Carron Nicks at legal information provider Nolo.

If your annuity was started with money from an IRA or certain other non-qualified retirement plans, it may also qualify for a federal exemption, Nicks also writes. However, this particular exemption comes with caps. Check with your CPA or attorney for more information.

On top of the exemption for retirement accounts, the federal bankruptcy code also has an exemption for an annuity that, according to Nolo, pays “on account of illness, disability, death, age, or length of service.” This clause can be found in section 522(d)(10)(E) of the federal bankruptcy code.

Several exemptions are also applicable to specific awards for bodily injury, wrongful death, or lost future earnings. According to Nolo, exemptions similar to these ones can be found as well in various states.

Nolo also reports that one of these exemptions might be used to protect an annuity funded by such an award as specified in them. However, those exemptions will be subject to certain limits.

Proactive Planning Makes a Difference

These laws to protect your money are great and can be very beneficial for the right situations.

But timing is also of the essence when you are planning asset protection strategies around these laws. You can’t establish this plan if you have already been sued or if a lawsuit against you is getting ready to occur.

In other words, you need to have your asset protection plan in place before these events happen. That is why proactive planning is of the essence.

If you are concerned about how you can protect your assets, schedule some time with your CPA or your attorney as soon as you can. They can discuss whether this sort of plan is right for your situation, as well as potential upsides and downsides.

Your financial professional can provide you with general information about annuities and creditor protection. But it’s prudent to realize they can’t advise you specifically on these situations.

That being said, their financial knowledge and expertise can make all the difference in finding the right annuity for you once you have a clear idea of the strategy you wish to pursue.

Exploring Options for Asset Protection

Sheltering money from creditors in an annuity should ultimately make sense for your financial situation and asset protection goals. Under IRS tax rules, annuities are treated as retirement savings vehicles. You can think of an annuity as a pension-like vehicle in this regard.

 So, if you have money or assets laying around that you don't want creditors to get hold of, it’s good to remember that these instruments are designed primarily for retirement purposes. Your financial professional can explain the ins-and-outs of this as you explore your options for asset protection.

If you are looking for someone to help guide you with your overall goals, then no sweat. Many independent financial professionals are available at SafeMoney.com to assist you. They can help you with your questions and walk you through the “what-ifs” that may be on your mind.

To get started, use our “Find a Financial Professional” section to connect with someone directly. You can request an initial appointment to discuss your situation and explore a working relationship. Should you need a personal referral, please call us at 877.476.9723.

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