At What Point Do Proceeds From Sale Of Exempt Asset Lose Their Protection?
A client received a lump sum disability insurance settlement and deposited the proceeds in his bank account. I told the client I thought his money is protected from creditors. The Florida statutes exempt proceeds of a disability insurance policy, and there are many judicial decisions which establish the general principal that proceeds of an exempt asset do not lose its exempt status after it is received and deposited in the debtor’s bank account. There are exceptions.
My client wants to invest his money. He asked me if the money would still be protected if he used the disability proceeds to buy publically traded stocks. He contends that as long as he can trace the stock purchase money back to the disability payout the stock still be exempt as proceeds of the disability policy.
I do not think the stocks would be exempt. In my opinion, the exemption attributed to proceeds of exempt assets goes only as far as the cash receipts placed in a financial account. My client’s purchase of stock converts the disability proceeds to a distinct type of asset. Unless the stock has its own exemption the investment of the money would lose end the disability protection. On the other hand, using disability proceeds to purchase an different exempt asset, such as an annuity or stock owned by the entireties, should not be a fraudulent conversion.
