Can Debtor Sell His Property In Consideration For Exempt Private Annuity Instead Of Typical Promissory Note?

An annuity is broadly defined as a contractual right to a payment stream. A bankruptcy debtor sold his business in consideration for a cash down payment and a promissory note providing for the buyer’s  minimum payments of $2,000 per month. The sales contract provided that the buyer’s  monthly payments could increase if the buyer’s business revenue exceeded a certain amount. The seller subsequently filed Chapter 7 bankruptcy and claimed the buyer’s payment obligation as an exempt annuity pursuent to Sections 222.14 of the Florida Statutes.

The bankruptcy judge said the parties’ promissory note is not an exempt annuity because it is a “promissory note.” For the debtor to have exempted the buyer’s payments under the annuity exemption, the court stated, the buyer and seller must have intended to create an annuity contract. The court pointed out that the parties agreement is entitled “Promissory Note”, that there is no reference to an annuity contract, that the buyer’s payment to debtor does not terminate upon the debtor’s death, and that the debtor is not identified in the sales agreement as a beneficiary of an annuity contract.

The court’s holding in this case is clearly correct; a debtor cannot take a self-described promissory note and call it an exempt annuity in bankruptcy court. But, the holding suggests asset protection planning opportunities for others. Sellers of businesses or real property could gain creditor protection of deferred sales income  by including in the  deferred payment provisions typical annuity features such as contingent death beneficiaries and payment termination after a certain number of years. The sales agreement could state that the buyer would pay the purchase price in the form of a cash down payment and a “private annuity contract” with typical annuity features. If the parties can demonstrate their intent to create an annuity contract rather than a promissory note for a fixed principal amount with interest this case suggests asset protection benefits. In re Holt, Case No. 08-bk-4288

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