Asset Protection Planning: Life Insurance and Annuities

ASSET PROTECTION STRATEGIES WITH LIFE INSURANCE AND ANNUITIES IN FLORIDA

1. Life Insurance- Florida law exempts life insurance from the claims of the insured's creditors in two ways. First, the proceeds payable under a life insurance policy on the insured's death are exempt from the insured's creditors and shall pass directly to the beneficiary named in the policy. A key exception to this rule is if the beneficiary under the policy is the insured's estate or personal representative (executor). If the insured's estate is the beneficiary under the policy (or the named beneficiary predeceases the insured), then the creditors of the insured's estate can seek to recover the debt or judgment against the life insurance proceeds.

Secondly, and perhaps more importantly from an asset protection perspective, during the insured's lifetime the cash surrender value of a life insurance policy is generally exempt from the insured's creditors. Some of the numerous asset protection planning opportunities created by the exempt status of the cash surrender value of life insurance are discussed further below.

Planning Opportunities With Life Insurance- As previously mentioned, the full cash surrender value of life insurance policies is exempt from the insured's creditors under Florida law. The exempt status of the cash surrender value coupled with the fact that income from assets held in an arrangement that qualifies as life insurance under the Internal Revenue Code is not subject to income tax. Therefore, using the tax free build-up of the cash surrender value in a whole life, universal life or variable life insurance policy might be an attractive investment alternative for a doctor or other professional who has ongoing liability exposure.

Also under Florida law, the proceeds payable on the insured's death will pass to the named beneficiaries free from the claims of the insured's creditors. However, it is important to note that once the life insurance proceeds are paid to the named beneficiaries the proceeds will then be subject to the claims of the beneficiary's creditors. Therefore, if the insured has a beneficiary that is a professional or a business owner who has personal guarantees on business debts or other sources of potential liability, then it would be more advisable for the insured to use an already popular estate planning technique known as an Irrevocable Life Insurance Trust (ILIT). While the primary goal of the ILIT is to remove the proceeds of life insurance from the insured's gross estate to reduce estate taxes, the ILIT can also be used to provide asset protection from the creditors of a beneficiary. In such a situation where a beneficiary may have particular creditor exposure, the trustee of the ILIT would hold the beneficiary's share of the life insurance proceeds in a continuing trust for his or her benefit. As long as the life insurance proceeds remain in the ILIT, that beneficiary's creditors would not be able to reach that beneficiary's share of the proceeds.

1. Annuities- Similarly, the proceeds from annuity contracts issued to Florida residents are also exempt from creditor claims. This exemption has been applied broadly by the courts because the applicable statute provides that Annuity contracts upon whatever form, shall not in any case be liable for any creditor of the person who is the beneficiary of such annuity contract.While this exemption would clearly apply to commercial annuity products, both Florida and bankruptcy case law has extended the scope of this exemption to both private annuities between family members (which are discussed further below) and structured settlement annuities arising out of litigation. The truly broad scope of this exemption make annuities an effective asset protection technique. The use of annuities for asset protection purpose is discussed further below.
   Planning Opportunities With of Annuities- Florida law provides a broad creditor exemption for the proceeds of annuity contracts issued to citizens or residents of the state, upon whatever form... from any creditor of the person is the beneficiary of such annuity contract.Thus, the annuity exemption applies to commercial annuity products, private annuities between trusts or family members, and structured settlement annuities arising out of litigation. Various court decisions have extended the protection of this exemption to also include the surrender value of a non-annuitized or deferred annuity. The broad scope of this exemption and its similarities to other retirement vehicles make annuities an effective asset protection technique.
   The application of the annuity creditor exemption to a private annuities between family members offers a great asset protection opportunity. A private annuity involves the transfer of property in exchange for an unsecured promise to receive a series of annuity payments. Typically, the current owner of the property (in our case, the person that has an interest in asset protection planning) would transfer the assets to an irrevocable trust in return for a stream of annuity payments from the trust that could be based on either the annuitant's life expectancy. Both the current and future annuity payments are exempt from the annuitant's creditors under Florida's statutory exemption. Typically, the trust would sell the transferred property and reinvest the proceeds in investments that would facilitate the stream of annuity payments. If this subsequent transfer by the trust is made shortly after the initial private annuity transfer then there would be little or no adverse income tax consequences to the trust.

Contact us by e-mail for more information: mminter@mintcofinancial.com