Debtor’s Age And Work Status Important For Defending Annuity Investment

Annuities are popular asset protection tools. Many of my clients suggest buying an annuity with some of their non-exempt money, and they ask me how much money they can safely put into annuities when they anticipate a lawsuit or judgment from an existing lawsuit.

The issue is fraudulent conversion. Using non-exempt money to purchase an exempt asset, the annuity, can be reversed if the purchase is intended to evade creditors. Fraudulent transfers and conversions are always “fact specific” questions. The transfer or conversion is examined under all the circumstances relevant to the transfer or conversion by the particular client.

Important factors for defending fraudulent conversion attacks against a debtor’s  annuity purchases, or his  contributions to retirement plans, are the debtor’s age and work status.. Annuities are used primarily to provide a guaranteed income stream for retirement after accumulation of tax deferred income. An older debtor with no employment or current business income has legitimate reasons for annuities other than for asset protection. These financial planning benefits for such client make it easier to fend off fraudulent conversion challenges.

This recession had destroyed many previously successful businesses, especially real estate related businesses. I often consult with older clients who have lost large and successful businesses and are worried about ballooning commercial loans related to their businesses. These clients have previously accumulated significant assets and cash savings. However, they have lost their ability to generate future income through their business. Such clients are good candidates for retirement planning through annuities notwithstanding their potential problems with their commercial lenders.

Even for the older debtor annuity purchases could be attacked as fraudulent conversions. The amount of annuities purchased must be justifiable as conservative and necessary financial planning. Investing more than 50% of a prospective debtor’s available cash in annuities would be difficult to defend, in my opinion. Relatively low percentages of liquid non-exempt assets converted to annuities are better, all thing equal. The point is that debtor’s nearing retirement with reduced current income can probably use annuities as an effective financial asset protection tool.

Page last updated on May 22, 2020

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