Annuities

Annuities are protected from judgment creditors. There are financial tools that combine asset protection of annuties with sound financial planning. One such tool is annuity arbitrage. 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 insured’s life expectancy. 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 done 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 an improperly structured arbitrage arrangement may have adverse income tax consequences.

Additional protection is available by purchasing international annuities. In particular, Switzerland and Liechtenstein have laws which guard annuities from attack by creditors from outside countries including the United States. Swiss law, for 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.

Jon Alper

About Jon Alper

Jon is an attorney focusing on bankruptcy and asset protection in Orlando, Florida.