Where Annuity May Not Be Fully Protected
The proceeds from an annuity are exempt from creditors under the Florida statutes. The statute protects from legal process the annuity interest of the beneficiary of the annuity. In almost all cases, the same individual purchases and owns the annuity and makes himself the annuity's primary beneficiary. The statute protects from creditors all of the beneficiary's interest in the annuity.
A different result may occur when the owner and the beneficiary are different individuals. For instance, suppose an individual purchases an annuity, makes himself owner and annuitant, and names another family member as primary beneficiary. The beneficiary's interest is protected from the beneficiary's creditors. Its not clear that the interest of the purchaser and owner is protected from the owner's creditors. An attorney called me this past week to discuss a bankruptcy proceeding where the debtor purchased and owned an annuity that named another family member as primary beneficiary. The question was whether the bankruptcy trustee could assert an interest in the annuity.
I think the trustee, or a creditor outside of bankruptcy, could attach the debtor's interest in the annuity under certain circumstances. The owner of an annuity has rights and powers, and where the annuity contract so provides, those rights usually include the right to change the beneficiary and the right to sell the annuity contract. If the annuity contract gives the owner the power to change beneficiaries the bankruptcy trustee could assume the debtor/owner's rights under the contract and name himself, the trustee, as beneficiary. Thereafter, the trustee could sell the annuity and the proceeds would be paid to the trustee as the replacement beneficiary. An annuity contract could make the initial appointment of the beneficiary's irrevocable, and in such case, neither the owner/debtor or the bankruptcy trustee or creditors could gain any financial recovery from the annuity as all proceeds would be paid to the initial beneficiary.
This question illustrates that Florida's statutory protections must be read precisely, and asset protection must be designed carefully.
posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida
Dear Sir:
This post left me confused as to when annuities will be protected. Are you saying that where the owner and the beneficiary are the same person then its definitely protected but where the owner is different from the beneficiary then the annuities are likely to be protected only where the owner has no power to change the name of the beneficiary?
I would appreciate a clarification. Thank you!
I have heard yesterday that an annuity is not creditor proof if there are no longer any surrender charges. I have never heard of anything like this. If this is true could you give me any references to this.
Thanks
You are quite wrong if you think that most annuities in Florida, or anywhere else, are written with the owner as the primary beneficiary! Check out any annuity application and most will ask the relationship of the beneficiary to the owner.
When the non-owner annuitant dies the owner establishes a new annuitant. If the owner dies, the primary beneficiary receives the proceeds or becomes the new owner if permitted by the insurance company .
If the contract is sold, the owner if living, not the beneficiary, gets the proceeds. If the contract is exchanged by 1035, the new contract owner must be the same person as the owner of the original contract, not a trustee.
Are you saying that an annuity only provides asset protection in Florida if the owner's estate is the beneficiary? If so, very few annunities are written this way, so there is a huge problem with annunites and asset protection. In actual practice, almost all contracts are witten with a family member or other close party as primary beneficiary.
Are Annuities in florida exempt from IRS levy?
ANNUITIES ARE 100% EXEMPT FROM LEGAL PROCESS IN FLORIDA FOR BOTH THE INSURED (ANNUITANT) AND THE BENEFICIARY. ALMOST ALWAYS THE OWNER AND THE ANNUITANT ARE THE SAME PERSON. THE STATUTE IS VERY CLEAR (SEE BELOW). IT DOESN'T MATTER IF THE SURRENDER CHARGES HAVE EXPIRED. HOWEVER, NO ASSET IS PROTECTED FROM FRAUD.
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.