Where Annuity May Not Be Fully Protected

The proceeds from an annuity are exempt from creditors under the Florida statutes. The statute protects from legal process the annuity interest of the beneficiary of the annuity. In almost all cases, the same individual purchases and owns the annuity and makes himself the annuity’s primary beneficiary. The statute protects from creditors all of the beneficiary’s interest in the annuity.

A different result may occur when the owner and the beneficiary are different individuals. For instance, suppose an individual purchases an annuity, makes himself owner and annuitant, and names another family member as primary beneficiary. The beneficiary’s interest is protected from the beneficiary’s creditors. Its not clear that the interest of the purchaser and owner is protected from the owner’s creditors. An attorney called me this past week to discuss a bankruptcy proceeding where the debtor purchased and owned an annuity that named another family member as primary beneficiary. The question was whether the bankruptcy trustee could assert an interest in the annuity.

I think the trustee, or a creditor outside of bankruptcy, could attach the debtor’s interest in the annuity under certain circumstances. The owner of an annuity has rights and powers, and where the annuity contract so provides, those rights usually include the right to change the beneficiary and the right to sell the annuity contract. If the annuity contract gives the owner the power to change beneficiaries the bankruptcy trustee could assume the debtor/owner’s rights under the contract and name himself, the trustee, as beneficiary. Thereafter, the trustee could sell the annuity and the proceeds would be paid to the trustee as the replacement beneficiary. An annuity contract could make the initial appointment of the beneficiary’s irrevocable, and in such case, neither the owner/debtor or the bankruptcy trustee or creditors could gain any financial recovery from the annuity as all proceeds would be paid to the initial beneficiary.

This question illustrates that Florida’s statutory protections must be read precisely, and asset protection must be designed carefully.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

About the Author

Jon Alper is an expert in asset protection planning for individuals and small businesses.

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