Variable Annuities And Asset Protection
I love getting reader feedback because often, readers catch details I’m either not aware of or forget to mention. Regular readers may remember my post How To Use Variable Annuities The Right Way in which I mention some of the more intelligent ways to use variable annuities to fatten your wallet (and not just the wallet of the salesman selling it to you). At the end of the post, I invited readers to share any other intelligent uses I didn’t mention. True to form, Bob chimed in with a comment on an extremely attractive attribute I didn’t even think of.
“You failed to mention the asset protection many states afford insurance/annuity products. If the investor faces possible creditor actions (physicians or other professionals who fear malpractice suits, real estate developers, etc.) investments made within an annuity may make a lot of sense. Many states, such as Florida and Texas, do not allow creditors to attach assets held within insurance policies or annuity contracts (or retirement accounts for that matter).
Granted, it’s not a universal reason most people should invest in an annuity, but it can be an important reason for a select few.”
It is very important to note that variable annuities hold no federal protection against creditors: qualified retirement accounts like IRAs are the only accounts holding that priviledge. But annuity contracts do hold strong protection against creditors in many states, such as Florida or Texas. In other states, a combination of annuities and a Limited Liability Company (LLC) can be used to achieve the same affect. In a few states, however, annuities hold no protection at all.
Consult Your Attorney
If you choose to go the asset-protection route, there is no substitute for hiring a competent and knowledgeable attorney to advise you on the ins and outs of your state’s laws. For high-income professionals such as doctors, developers, or other investors at above-average risk of costly lawsuits and large quantities of money to shelter, it makes sense to go to the extra expense of hiring an attorney to help ensure their assets are secure in case disaster strikes. The average investor, however, probably has no use for this particular feature since standard retirement accounts already have federal protection and the average Joe is likely to have relatively few investments outside of these accounts. It goes without saying that even high-net-worth investors shouldn’t bother with an annuity until after maxing out more conventional retirement accounts such as their 401k or SEP-IRA.
“variable annuities hold no federal protection against creditors”
In general, the federal courts look to the state exemption laws of the state where the federal district is located. So, a federal court sitting in Texas would apply Texas’ exemption for annuities, including in a federal bankruptcy proceeding.
IRAs and other qualified accounts are subject to a $1 million cap in bankruptcy under the bankrutpcy reform act of 2005, but annuities and life insurance were not capped in that Act. So, if annuities or life insurance have an unlimited exemption in a state, they will also have that unlimited exemption in bankruptcy.
BTW, collection law does not typically distinguish between variable annuities and fixed annuities, i.e., they are all just “annuities” for creditor-debtor purposes.
Great article and sheds a lot of light on a topic I know little about. Unfortunately I am not one of those high income professsional yet…