What happens to an annuity if the contract owner declares bankruptcy? Is an annuity exempt from the claims of creditors? How would a creditor or bankruptcy trustee address an annuity asset? Are proceeds from an annuity protected from creditors' claims?
Some assets are protected from creditors by federal and/or state statute. This protection is usually granted to the debtor because the asset is considered essential for the debtor and the debtor's family to maintain at least a minimum level of financial well-being and avoid becoming a burden to the state. The extent of such creditor protection, however, is tempered by society's proper concerns for the creditor's rights to access the debtor's property to satisfy his legitimate claims.
A debtor's home, retirement plan, and individual retirement accounts (IRAs) are, perhaps, the most widely recognized favored assets because they help to ensure a debtor's financial subsistence. Since annuities often substitute for or supplement retirement plans and IRAs, annuities have in some states been exempted by statute from the claims of creditors. However, the exemptions afforded to annuities are usually limited and subject to the vagaries of the presiding courts.
The table below was reprinted from the Journal of Asset Protection, Research Institute of America. The table summarizes the state statutes relating to annuity assets which may or may not be exempt from creditors as of October, 2003. Please check the most current state statutes.
You are strongly advised to consult with a competent legal professional who is knowledgeable about the current statutes and court decisions in your jurisdiction before purchasing an annuity contract. The information in this table assumes that the purchase of the annuity does not constitute a fraudulent transfer under applicable federal or state law. If it did, any protections which may otherwise be afforded would be vitiated by the fact of the fraudulent transfer.