When Are Annuity Proceeds No Longer Protected?
Florida Statute 222.14 protects from creditors annuities and the proceeds of an annuity. A client posed an interesting question about what happens when annuity proceeds are invested in a different type of asset which other asset is not asset protected. The issue is when do annuity proceeds turn into another type of asset. For example, suppose a Florida resident uses annuity proceeds to purchase a CD or stock, is the CD or stock protected if it is purchased solely with annuity proceeds? Does it make a difference if the annuity was held in a brokerage account and the CD or stock is purchased within the same account?
It seems that the general rule is that annuity proceeds continue to be exempt as long as they are traceable back to the annuity. I partially researched the issue and found a couple Florida bankruptcy cases which held that assets purchased with annuity proceeds are exempt from creditors if traceable to the annuity. These courts believed that the debtor may enhance or invest annuity proceeds in order to provide for his economic well being without losing the protection afforded by the Florida statute.
I think a debtor takes a risk, despite these court decisions, whenever annuity proceeds are transformed from cash into another asset class. There's a significant chance a court is going to find that the debtor intended to convert annuity proceeds into another type of asset which is not protected. Logically, the investment and reinvestment of annuity proceeds would lose its character of protected proceeds over time. Where that point is may be depend on the particular fact of the case.
posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida
