Unraveling the Mysteries of the Florida Exemptions for Life Insurance and Annuity Contracts, Part 1

Florida has laws that protect residents’ assets, like their primary residence, life insurance, annuities, retirement accounts, and education savings accounts. In this two-part article, we’ll look at the rules for protecting life insurance and annuities in Florida. Part one focuses on how life insurance is protected after the insured person passes away, how the policy is owned, and how the cash value of the policy can be accessed without losing the protection. We’ll also discuss what qualifies as an annuity contract. If a Florida resident dies and leaves behind life insurance, the money from the policy goes to the person named as the beneficiary and is protected from the deceased person’s creditors. But if the money goes to the deceased person’s estate, it becomes part of their assets and can be used to pay their debts. To make sure the insurance money is protected, it’s important to make sure it doesn’t become part of the deceased person’s estate. It’s also important to note that this protection doesn’t apply to the beneficiary’s creditors, so additional planning may be needed to protect the money from the beneficiary’s creditors. Section 222.14 of the law says that the cash value of a life insurance policy or the money from an annuity contract cannot be taken by a creditor of the person who has the insurance or annuity, unless the policy was specifically set up for that creditor. This protection only applies to the person who has the insurance or annuity, and not to anyone else who might have a stake in the policy. It also doesn’t protect any collateral rights in the policy, like a repayment right in a premium financing arrangement, even if the person who owns the policy has those rights. The exemption protects the cash value of a life insurance policy, but it’s unclear if it also applies to withdrawals or policy loan proceeds. Cases have shown that the exemption can protect funds withdrawn from an insurance policy or used for a policy loan. However, it may be difficult for a debtor to retain this exemption, so it’s recommended to transfer insurance policies to a nondebtor spouse, child, or a trust for better protection. Private placement life insurance (PPLI) is also a good option for asset protection and tax-efficient investment planning for Florida residents. Annuity contracts are also protected under the exemption, and a court case provided an analysis of what qualifies as an annuity contract. The Florida Supreme Court ruled that a debtor’s annuity contract was protected from creditors. The court found that the contract fell within the definition of an annuity and therefore was exempt from creditor claims. However, some dissenting judges argued that the term “annuity contract” was ambiguous and that the legislative history of the law should have been considered. They pointed out that the law was amended in 1978 to exempt annuity contracts, and the legislative history showed that this exemption was intended to apply only to commercial annuities governed by the Florida Insurance Code. The dissenting opinion in the McCollam case had a better understanding of the law than the majority opinion. The Florida Insurance Code defines “life insurance” to include annuity contracts, and it requires that insurers have a certificate of authority to do business in the state. The majority opinion reached the right conclusion, but for the wrong reasons. The debtor’s annuity contract should have been protected under the law, and the dissenting opinion got that part right. Overall, it was a strange result, with the majority opinion having a flawed analysis and the dissenting opinion reaching the wrong conclusion despite understanding the law correctly. In a bankruptcy case, a court ruled that a trust set up by a person for the benefit of their family, along with an agreement to pay them a certain amount of money at intervals, counted as an annuity contract. The person was allowed to keep this as an exemption during the bankruptcy. The bankruptcy court ruled that a person can protect their assets by setting up an annuity with a related party, but only if it’s established for estate planning purposes and to minimize potential estate taxes. This means that simply receiving periodic payments is not enough to qualify as an annuity for bankruptcy protection. The court also mentioned a case where a lottery winner tried to claim their winnings as an annuity, but the court disagreed because the annuity contract was actually owned by the state and not the lottery winner. Overall, the definition of an annuity contract is still unclear and can vary based on the circumstances. In simple terms, a court decision called McCollam made it unclear if a certain type of annuity can be exempt from bankruptcy. Another case called Mart said it could, but that decision might not hold up in the future. It’s best not to rely on Mart when advising clients because other courts might say the exemption doesn’t apply to this type of annuity. Also, private annuities, which are set up by the debtor and their family, might be looked at more closely by the court to make sure they’re not just trying to avoid paying creditors. Florida law allows residents to protect their property, such as their home, insurance, retirement savings, and educational savings accounts, from creditors. However, some of these protections may not apply in bankruptcy or if the property was fraudulently transferred. When a person dies, their insurance money usually goes to the person named in the policy and is protected from the deceased person’s creditors. However, if the insurance is payable to the deceased person’s estate, then it becomes part of their assets and can be used to pay their debts. If you live in Florida and have a life insurance policy or annuity, the cash value and proceeds from them cannot be taken by creditors, unless the policy was specifically taken out for that creditor. This means that the money in your life insurance or annuity is protected from being taken if you owe money to someone. This was decided in court cases like Bank of Greenwood v. Rawls and Technical Chemicals and Products, Inc. v. Porchester Holdings, Inc. Some states and countries allow people to create trusts to protect their assets. This means that if someone sues you, they can’t take the money and property in the trust. Florida also protects the cash value of life insurance policies from being taken by creditors. Certain places, like Bermuda and the Bahamas, have special rules for life insurance policies that can also protect your money. Using a life insurance policy can also protect your assets in a trust from being taken. There’s a debate about whether these protections should also apply to a person’s family members and dependents. The court decided that the debtor can’t keep the annuity as a hidden asset from the creditor. The creditor argued that the annuity was just security for Travelers’ obligation to pay the debtor, but the court disagreed. Even if the court had looked at the history of the law, they probably would have still made the same decision. There are some Florida state laws mentioned, and a previous bankruptcy case, but they might not apply in this situation. Jonathan E. Gopman, Howard M. Hujsa, and Matthew N. Turko are lawyers who work at a law firm called Cummings & Lockwood, LLC. They specialize in helping people protect their money and assets. They have written articles and given talks about estate planning and protecting wealth.

Source: https://www.floridabar.org/the-florida-bar-journal/unraveling-the-mysteries-of-the-florida-exemptions-for-life-insurance-and-annuity-contracts-part-1/