ANNUITIES
Annuity arbitrage is
a financing tool which enables older debtors in good health
to fully fund life insurance for their descendants and generate
cash flow protected from creditors during their lifetime. The
life insurance, the annuity, and even the annuity proceeds paid
to the debtor are protected from creditors under Florida law.
Immediate annuities involve a lump sum investment in an annuity
contract in exchange for a guaranteed income stream. The amount
of the income stream is based on prevailing interest rates,
and most importantly, on the age and health of the annuitant.
Annuitants with a shorter life expectancy because of age and
health typically are offered larger periodic payments. Life
insurance premiums are also based on the same insured’s
life expectancy. Importantly, different companies selling either
immediate annuities or life insurance contracts sometimes use
different mortality tables and make significantly different
judgments on a person’s life expectancy. When the annuity
issuer assumes a shorter life expectancy for the applicant than
does the life insurance issuer the applicant has a financial
opportunity.
Sometimes an experienced and astute financial professional can
match individuals with particular annuity companies and particular
life insurance companies to create a meaningful divergence in
life expectancy assumptions. When the annuity company is convinced
of a relatively shorter life expectancy, and the applicant’s
health, although not necessarily perfect, is good enough to
warrant life insurance based on a relatively longer life expectancy,
the annuity income stream will often exceed life insurance premiums.
In such event, the immediate annuity will provide payments in
excess of life insurance premiums, and the immediate annuity
both funds the life insurance and provides the individual a
cash flow sheltered from creditors. The life insurance policy
is typically owned by a life insurance trust to keep the insurance
outside the insured’s taxable estate and to protect the
death benefit from the beneficiaries’ creditors and former
spouses.
The profit potential from this investment is important in defending
creditor attacks of fraudulent conveyance. If the creditor argues
that a debtor purchased the annuity and insurance to shelter
money from creditors, the debtor responds that the investment
was made to take advantage of an unusual arbitrage opportunity
to fund life insurance for estate planning purposes and generate
cash flow for lifetime support. Only certain, relatively sophisticated
financial professionals can arrange a profitable annuity arbitrage.
Individuals should only deal with financial advisors with demonstrated
experience in successful annuity arbitrage as improperly structured
arbitrage arrangements may have adverse income tax consequences.
Additional protection
is available by purchasing international annuities. Particularly,
Switzerland and Liechtenstein have laws which guard annuities
from attack by creditors for outside countries including the
United States. Swiss law, or instance, provides that swiss annuities
are not part of a debtor/owner's bankruptcy estate even if a
foreign (U.S.) court expressly directs liquidation of the annuity
policy. Swiss and Liechtenstein fraudulent conveyance statutes
provide that a fraudulent conveyance claim against their annuities
must be brought in their country's courts. Moreover, purchasing
an annuity in the U.S. as well as offshore may more easily be
defended against fraudulent transfer allegations as being a
prudent financial planning tool.
