Annuity Asset Protection Strategies

Annuity P.I.L.L.: Principal Protection. Income

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Annuities are a contract between you and the issuing carrier, typically an insurance company. In a perfect world, annuities would be owned for their contractual guarantees, because they primarily solve four issues.

An acronym some people use to determine if you even need an annuity is PILL. P stands for principal protection. I stands for income for life. L stands for legacy (leaving money to your heirs), and the other L stands for long-term care. If you don't need to solve for one or more of these four issues, then you don’t necessarily need an annuity.

There is one more important feature an annuity can offer, but only in specific states. That important feature is asset and creditor protection. Many states don't have statutes that offer this protection from lawsuits and creditor actions, so it’s important to check with a tax lawyer in your area to find out your state’s actual laws concerning this issue.

Two states have very strong asset and creditor protection statutes for life insurance and annuities: Florida and Texas.

Annuity Protection in Florida

Florida is one of the states that has the strongest protection statutes. The actual statute is 222.14, and it reads as follows:

Exemption of cash surrender value of life insurance policies and annuity contracts from legal process. The cash surrender values of life insurance policies issued upon the lives of citizens or residents of the state and the proceeds of annuity contracts issued to citizens or residents of the state, upon whatever form, shall not in any case be liable to attachment, garnishment, or legal process in favor of any creditor of the person whose life is so insured or of any creditor of the person who is the beneficiary of such annuity contract, unless the insurance policy or annuity contract was effected for the benefit of such creditor.

That’s the actual statute, word for word, and it's pretty self-explanatory. Many doctors, surgeons, entrepreneurs, and others fully protect all of their assets by paying off their house in full (also protected in Florida) and then placing all of their non-IRA (non-qualified) assets in annuities.

Annuity Protection in Texas

Texas has a similar statute that is just as strong as Florida’s. Cash value proceeds of an annuity or insurance policy are deemed exempt from creditors and lawsuits. Residents living in sunny Florida have been known to joke that if Florida ever changes their asset protection laws, they're hopping on the next plane to Texas.

Other states may protect annuities as well. Talk to an attorney, CPA, or experienced financial planner in your state to find out if it protects annuities from lawsuits and creditors.

IRAs and Qualified Accounts

Many people are not aware of this, but personal IRAs and qualified accounts like 401(k)s and 403(b)s are protected from creditors and lawsuits as well. Notably, state laws vary as to the level of creditor protection for IRAs, so be sure to check the rules for your state. Food for thought: if you place all of your non-IRA money in annuities or life insurance products, then all your money is protected if you live in a state that offers protections for those financial products.

Preemptive Planning Is Essential

These laws to protect your money are fantastic, but you can’t implement the plan after you have been sued, or if the lawsuit is getting ready to happen. You have to have this plan in place before any problems are on the horizon, so it’s important not to procrastinate if asset protection is your ultimate goal. When it comes to a lawsuit or creditor action, you need to be able to prove that the annuities were in place long before any actions were taken.

Creditor and asset protection is just one more reason to properly do your homework when considering an annuity. Depending on which state you live in, there might be an extra benefit that you were not aware of, and one that could legally protect your hard-earned money.

If you're worried about how you can protect your assets, make an appointment with your CPA or attorney to discuss whether this kind of strategy makes sense for you and your financial situation. It's important to note that your annuity agent can't advise you on this, and they are there only to help implement your annuity plans.