by Gideon
Rothschild and Daniel S.
Rubin
Unlike man, all assets are not created
equal-at least from an asset protection planning standpoint. Instead, some
assets are favored by statute so as to provide their owner (herein referred to
generally as the "debtor") a greater level of protection from the
claims of creditors than do other assets. Usually this heightened level of
protection, offered under either the federal Bankruptcy Code1
or a state's alternate statutory exemption scheme2
is provided 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 thereby avoid becoming a burden to the state. The extent of such creditor
protection is, of course, tempered by society's proper concern for the
creditor's competing rights to access the debtor's property for the
satisfaction of legitimate claims.
After the homestead exemption, retirement
plans and individual retirement accounts (IRAs) are, perhaps, the most widely
recognized and obvious examples of such favored assets since, like the
homestead exemption, they help to ensure a debtor's financial subsistence.3
Since commercial annuities often substitute for or supplement retirement plans
and IRAs, it should come as no surprise that, to a greater or lesser extent,
they too are generally exempted by statute from the claims of creditors. Life
insurance is often similarly favored because it can serve a similar function
with regard to the debtor's spouse and dependents after the "bread
winning" debtor's death. (This discussion assumes that the purchase of the
annuity or insurance contract does not constitute a fraudulent transfer under
applicable federal or state law since, under that scenario, any protections
that would otherwise be afforded are vitiated by the fact of the fraudulent
transfer.)
Notwithstanding the foregoing, however, the
exemptions afforded to life insurance and annuities are frequently more
limited, more widely varied by jurisdiction, and seemingly more subject to the
vagaries of the presiding courts than are the exemptions afforded to retirement
plans and IRAs. For example, the Supreme Court has ruled, in Patterson v. Shumate,4
that retirement plans that are qualified under ERISA (29 U.S.C. section 1001,
et seq.) are exempt from the claims of the employee's creditors pursuant to 11
U.S.C. section 541(c)(2) as an enforceable spendthrift trust under
"applicable non-bankruptcy law." Furthermore, by association, IRAs
established under Internal Revenue Code (IRC) Section 408 (and most likely Roth
IRAs established under IRC Section 408A, as well), may be exempt under 11
U.S.C. section 522(d)(10)(E), which exempts "a payment under a stock
bonus, pension, profit sharing, annuity, or similar plan or contract on account
of illness, disability, death, age, or length of service. . . ." or under
state exemption statutes. Seemingly, this reasoning would also extend to
commercial annuity products, at least if held for true retirement planning
purposes (rather than as they are sometimes marketed-as a tax-favored
investment vehicle), but significant issues remain.
Notwithstanding these factors, the potential
value of such exemptions to a debtor or potential debtor means that the exemptions
warrant a careful and considered review by both asset protection planners and
bankruptcy counsel acting in a pre-bankruptcy planning function. (Although
foreign life insurance and annuity products may offer more protection from
creditors than do their domestic counterparts, such products are beyond the
scope of this article.)
Life Insurance
Consideration of the potential creditor
protections afforded to life insurance contracts is complicated by the several
capacities in which the debtor may have an interest in the policy. For example,
the debtor can be the owner of the policy, the insured, or both the owner and
the insured. Alternatively the debtor may be the beneficiary of the policy or
the owner of a policy that names his or her estate as the beneficiary of the
policy. To further complicate matters, since the exemptions afforded to life
insurance are intended to further particular public policy goals (i.e.,
protecting the debtor's dependents from financial destitution in the event of
the debtor's untimely demise), the relationships between the owner and the
insured and between the owner and the beneficiary are often key to determining
whether and to what extent the particular life insurance policy at issue may be
protected from creditor claims. These additional permutations exponentially
increase the complexity of determining whether the life insurance policy may be
exempted in any particular circumstance.
The federal bankruptcy exemptions for life
insurance policies owned by the debtor are found at 11 U.S.C. sections
522(d)(7) and (8), where their relative importance to the average person is,
perhaps, evidenced by their placement between the exemptions for the debtor's
professional books and tools of the trade and the debtor's professionally
prescribed health aids. More specifically, the federal bankruptcy exemptions
for life insurance shield unmatured policies owned by the debtor (other than a
credit life insurance contract)5
and up to $8,6256
of the debtor's aggregate interest in any accrued dividend or interest under,
or loan value of, an unmatured life insurance contract, provided that the
insured is either the debtor or an individual of whom the debtor is a
dependent.7
Since, however, federal bankruptcy law broadly defines a dependent as including
a spouse, regardless of whether the debtor's spouse is actually dependent on
the debtor, the exemption will apply without further inquiry so long as either
the debtor or the debtor's spouse is the insured.8
The effect of the foregoing exemption is to
protect the actual insurance element of the policy and little else, since only
a minimal portion of the cash surrender value of the policy is afforded any
exemption. While the exemption of an unmatured life insurance contract without
the exemption of the cash surrender value may prove invaluable in certain
limited circumstances (for example, if the debtor has become uninsurable since
the life insurance policy was originally purchased), it obviously does not
provide significant opportunities for asset protection or pre-bankruptcy
planning for the insured.
That the primary intent of the Bankruptcy Code
as it relates to the exemption of life insurance is to protect a dependent's
interest in the life insurance policy, rather than the owner's own interest, is
further supported by 11 U.S.C. section 522(d)(11)(C). That section concerns the
debtor as the beneficiary of the policy (rather than as the owner of the
policy) and exempts the debtor's entitlement to the proceeds of a life
insurance contract, without any specific dollar limitation, to the extent that
such proceeds are "reasonably necessary" for the support of the
debtor and any dependent of the debtor. For the exemption to apply the debtor
has to have been a dependent of the insured at the time of the insured's death.
Since the federal exemption scheme for life
insurance that is owned by the debtor is so parsimonious, if an exemption under
an alternative state scheme is provided, it should be carefully considered.
Following the model of the federal exemption scheme, some states provide very
limited exemptions for the cash surrender value of life insurance. For example,
Other states, however, have exemption schemes
that provide for far greater protection of the cash surrender value of life
insurance policies than does the federal exemption scheme. For example, in
keeping with its generally pro-debtor stance,
New York's scheme for the exemption of life
insurance17
is worth noting because it clearly distinguishes between the several
permutations which can result depending on whether the debtor is the owner of
the policy (referred to under the New York statute as the person
"effecting the policy," and need not be the person who actually
purchased the policy), the insured, the beneficiary, or some combination
thereof. More specifically, the
1.
If
the owner of a life insurance policy insures his or her own life for the
benefit of another (i.e., a beneficiary other than the owner's estate), that
other person shall be entitled to the proceeds and avails of the policy as
against the creditors of the owner. (In other words, the beneficiary's interest
in a life insurance policy owned by another is protected from claims of the
policy owner's creditors, notwithstanding the fact that a power to change the
beneficiaries of the life insurance policy has been reserved.)
2.
If
the owner of a life insurance policy insures the life of another for the
owner's own benefit, the owner is entitled to the proceeds and avails of the
policy as against the creditors of the insured. (In other words, the interest
of an owner of life insurance in the policy is protected from the creditors of
the insured).
3.
If
the owner of a life insurance policy insures the life of his or her spouse for
the owner's own benefit, the owner is also entitled to the proceeds and avails
of the policy as against his or her own creditors. (In other words, the
interest of an owner/beneficiary of life insurance in the policy is protected
from the owner/beneficiary's own creditors if the insured is the owner's
spouse).
4.
If
the owner of a life insurance policy insures the life of another person for the
benefit of a third party, the third party is entitled to the proceeds and
avails of the policy as against the creditors of both the owner and the
insured. (In other words, the beneficiary's interest in a life insurance policy
is protected from claims of the creditors of both the owner of the policy and
the insured).
5.
The
owner of a life insurance policy, regardless of the identity of the insured, is
entitled to accelerated payment of the death benefit or accelerated payment of
a special surrender value permitted under such policy as against the creditors
of the owner. (In other words, the owner's interest in the cash surrender value
of a life insurance policy is protected from claims of the owner's own
creditors).
Even the extensive
Thereafter, both the husband and his wife
became debtors of the same judgment creditor. Since the law in effect at that
time provided that a life insurance policy insuring the owner's own life for
the benefit of another is protected from the owner's creditors, but did not
then expressly provide that the same life insurance policy is protected from
the debtor beneficiary's own creditors, the novel issue arose as to whether a
joint judgment creditor could enforce its judgment against the life insurance
policies. Based on a liberal interpretation of legislative intent to the effect
that the statutory exemption of the debtor/owner's interest was intended to
protect all cases in which a person invested his or her own money to insure his
or her own life for the benefit of another, the Dellefield court held that the
life insurance policies could not be reached by the parties' joint judgment
creditor.
Other issues, of course, exist as well. For
example, in the New York statute, the phrase "proceeds and avails" is
defined to include ". . . death benefits, cash surrender and loan values,
premiums waived, and dividends, whether used in reduction of premiums or in
whatever manner used or applied, except where the debtor has, after issuance of
the policy, elected to receive the dividends in cash."20
Unlike New York, however, not all state statutes expressly define which
incidents of value of a life insurance policy (i.e., specifically the debtor's
ability to shield the cash surrender value of a life insurance policy versus
the debtor's entitlement to the proceeds of a matured policy on the life of
another) are covered by the exemption scheme at issue. Therefore, the issue may
arise as to whether and to what extent the cash surrender value may be exempted
when the statute refers only to "monies paid out of a life insurance
policy" or similarly ambiguous language. In this regard, in In re Worthington,21
a bankruptcy court, interpreting a Kentucky exemption statute that provided
simply that "[a]ny money or other benefit to be paid or rendered by any
assessment or cooperative life or casualty insurance company is exempt from
execution or other process"22
determined that an unlimited exemption was provided for the cash surrender
value of life insurance policies. The
This statute does not restrict "any money or other
benefit to be paid . . . " as exemptible only upon death but rather it
denotes an exemption extending to the debtor on any monetary value or benefits
accruing by virtue of ownership. Thus, the loan values or the cash surrender
values by virtue of the enactment of the Kentucky Legislature have been deemed
exempt since the term "any money . . . to be paid" is not restricted
as to time of election and offers no alternative but to include the cash
surrender value within its definition. . . . The
Similarly, it has been held that when
reference is made to the "proceeds and avails" of a life insurance
policy, such reference comprehends the protection of cash surrender values and
other values built up during the life of the policy as well as the protection
of its death benefit, even if not expressly so provided by statute.24
Notwithstanding the express unlimited exemption
that exists in some states, however, the actual use of such an exemption may
have the unintended effect of reducing the debtor's general exemption for
personal property.
The fact that the unlimited exemption for the
cash surrender value of life insurance that exists in some states can be abused
by dishonest debtors has been considered by the bankruptcy court and
appropriately disregarded as a basis for judicially recasting the import of the
exemption statutes. For example, in In re
White,25
the bankruptcy trustee, objecting to the debtor's argument that the cash
surrender value of his life insurance policy should be exempted as part of the
unlimited exemption for the "proceeds and avails" of life insurance
referred to under West Virginia's exemption statute, poignantly argued that to
hold the cash surrender value exempt would:
. . . provide a debtor with an avenue for depositing his
funds, in unlimited amounts, in a species of property which would place it
beyond the reach of his creditors, but not beyond his own reach after his
discharge in bankruptcy.
Similarly in In re Beckman,26
the bankruptcy trustee argued that to hold the cash surrender value of the
debtor's life insurance policy exempt would be to make an insurance policy
"a refuge for fraud." In each case, however, the bankruptcy court
responded by stating that such an argument overlooks the fact that the
exemption statute expressly provides that premiums paid in fraud of creditors
would, nevertheless, inure to the benefit of creditors. In any event, ". .
[i]f abuses to enacted exemptions are deemed to exist, the remedy is = by other
than judicial legislation." Such reasoning would seem to exempt even
single premium policies purchased as a safe harbor for otherwise non-exempt
funds; provided, however, that it cannot be proven that the single premium
payment constituted a fraudulent transfer.
Therefore, for the residents of certain
states at least, valuable asset protection and pre-bankruptcy planning
opportunities exist using life insurance policies; provided, as always, that
the conversion of non-exempt assets into exempt assets (be they cash surrender
value life insurance policies or otherwise) is not made with the intent to hinder,
delay, or defraud creditors. (The reorganization of a debtor's holdings into
exempt assets prior to bankruptcy for the purpose of shielding such assets from
creditors is generally held to be acceptable pre-bankruptcy planning rather
than transfers fraudulent as to creditors.)
Notwithstanding the foregoing, however, the
greatest protection for life insurance exists irrespective of the exemptions
afforded by applicable law, relying instead on traditional (and not so
traditional) estate planning techniques. For example, the owner of the policy
(the settlor) may transfer his or her policies to an irrevocable spendthrift
trust (or even better, the settlor can create an irrevocable spendthrift trust
to acquire the life insurance policy in the first instance), thereby protecting
the value of the life insurance policy not only from creditors (both those of
the settlor and those of the trust beneficiaries, and regardless of their
relationship to each other or to the insured), but from taxation in the settlor's
estate as well under IRC Section 2042. IRC Section 2035(a)(2), however,
includes in the settlor's gross estate the proceeds of any life insurance
policies that were transferred within the three-year period ending on the date
of the settlor's death. At the same time, there is little doubt that section
541(c)(2) of the Bankruptcy Code would also serve to exclude the trust property
from the settlor/debtor's bankruptcy estate as a spendthrift trust enforceable
under applicable non-bankruptcy law.
Furthermore, the transfer of life insurance
policies to an irrevocable life insurance trust need not place the potential
benefit of the cash surrender value of such policies beyond the settlor's
reach. A married settlor can name his or her spouse as a discretionary beneficiary
of the trust and, therefore, to the extent that the trustees are amenable to
making a distribution of property out of the trust to the spouse of the
settlor, the settlor can attain an indirect benefit from the trust property for
so long as the spouse survives. If, however, the settlor is unmarried, or if
the settlor is concerned with the possibility that his or her spouse may be the
first of the pair to die, the settlor can establish the trust under the laws of
Alaska or Delaware (or, alternatively, under the law of certain, select,
off-shore jurisdictions such as the Cook Islands), since the law of each of
those jurisdictions provides that the owner of property (including life
insurance policies) can create a discretionary trust for his or her own benefit
without leaving the transferred property subject to the claims of his or her
creditors. (There may, however, be a risk of creditor attachment in such a
self-settled trust if the assets are within the
Annuities
The federal bankruptcy exemption for annuity
payments is found at 11 U.S.C. section 522(d)(10)(E). Like the federal
exemption for the cash surrender value of life insurance policies, the
exemption for the right to receive an annuity is not overly generous and does
not lend itself to asset protection or pre-bankruptcy planning. Specifically,
the federal exemption for the right to receive an annuity provides that
payments may be exempted only if payable by reason of ". . . illness,
disability, death, age, or length of service . . . " and even then, only
to the extent "reasonably necessary" for the support of the debtor
and any dependent of the debtor. Therefore, planning opportunities under the
federal exemption for the right to receive an annuity are limited because of
the requirement that the annuitant be ill, aged, dead, or have performed a
certain length of service. Even if the debtor was the beneficiary of such a
fortuitously placed annuity, the exemption of the payments to be received by the
debtor would most likely be subject to litigation to resolve whether they are
in an amount required under the exemption's "reasonably necessary"
standard. While the "reasonably necessary" standard is sensitive to
the debtor's particular situation, the courts have generally proven extremely
spare in applying the exemption under such standard. In Warren v. Taff,28
the court stated that "[t]he reasonably necessary standard requires that
the court take into account other income and exempt property of the debtor,
present and anticipated . . . the appropriate amount to be set aside for the
debtor ought to be sufficient to sustain basic needs, not related to [the
debtor's] former status in society or the lifestyle to which [the debtor] is
accustomed. . . ." In In re Hunsucker,29
for example, a 57-year-old teacher's aide was allowed to exempt a commercial
annuity when her anticipated teacher's retirement benefits were only $50 per
month.
State law exemptions for the right to receive
an annuity, on the other hand, vary greatly from one state to another, but
generally align with the state's exemption for the cash value of life insurance
policies.
. . . the court may order the annuitant to pay to a judgment
creditor or apply on the judgment in installments, a portion of such benefits
that appears just and proper to the court, with due regard for the reasonable requirements
of the judgment debtor and his family, if dependent upon him. . . .33
Moreover, the New York exemption for the
right to receive an annuity is further qualified by New York Debtor and
Creditor Law § 283(1), which generally provides that the exemption for annuity
contracts initially purchased by the debtor within six months of the debtor's bankruptcy
filing are capped at $5,000, irrespective of the reasonable income requirements
of the debtor and his or her dependents. The intent of this latter section of
the statute, according to the bankruptcy court in In re Moore,34
is to ". . . limit the debtor's ability to deliberately 'load up' on
exempt property" Exhibit 1 contains a state-by-state tabulation of the
exemptions.
In states where the exemption for the right
to receive an annuity is unlimited, litigation has centered around the issue of
whether the interest held by the debtor is, in fact, an annuity under the
exemption statute at hand. In
In re Mart39 took the broad definition of an annuity under
. . . if (the debtor's income stream from the transfer of
this property is an Annuity, any debtor can go to his cousin and give him all
of his property in return for a promised stream of income. That debtor need
only pull out his big rubber stamp with the word Annuity on it and label the
agreement from his cousin to pay the money.
Notwithstanding the piquancy of this
argument, and like its predecessor in In re
White, the bankruptcy court in In
re Mart dismissed this argument to find in favor of the debtor. In re Mart, however, gave more of an
explanation of its reasoning than did In re
White, stating that:
I agree that this statutory exemption, perhaps like all
exemptions, invites abuse. I also agree that the debtor's relationship with the
. . . trustee, her evident willingness to accept her father's proposals, and
the fact that this is a completely private arrangement are grounds for careful scrutiny.
. . . I reject the argument and the objections, however, because, (1) . . . the
statutory exemption is not restricted to annuities provided by completely
unrelated, public entities, and (2) I find no intent to defraud creditors in
this debtor's conversion of his non-exempt assets to exempt assets through the
establishment of this annuity contract.
In contrast, the court in In re Gefen,41
determined that the debtor's conversion of a non-exempt individual retirement
account to an annuity with an intent to defraud creditors was a fraudulent
transfer voidable under the
Like life insurance, the exemption for the
right to receive an annuity is provided under applicable federal and state law
for a particular purpose; to allow persons to ensure their retirement savings
through vehicles peculiarly structured to provide an income stream during
retirement (i.e., the minimum distributions required for ERISA qualified plans
and IRAs, or the delayed lifetime income stream provided by the traditional
annuity). In the past, annuity contracts were generally held by government
workers and the employees of not-for-profit institutions (for example, the
Teachers' Insurance and Annuity Association (TIAA-CREF), which is one of the
country's largest providers of annuities) for whom other retirement plans were
unavailable, as well as by those retirees who chose to receive distributions
from other retirement plans in the form of an annuity rather than via a
"roll-over" into an IRA. More recently however, commercial annuities
(such as variable annuity contracts) are being purchased by individuals purely
as a tax-favored investment vehicle without any view towards the annuity's
traditional use for retirement savings. Such products were most likely never
intended to be exempt and a colorable argument can be made by creditors to the
effect that such products should not be held exempt, notwithstanding that they
are, in fact, annuities.
A similar issue arises when a debtor converts
non-exempt assets into an exempt annuity shortly prior to bankruptcy since the
purpose of such conversion is likely less to provide for retirement needs than
to "avoid" creditors (although not necessarily with any noisome
connotation). In In re Johnson,42
the debtor, a physician, personally guaranteed $19 million of the obligations
of a corporation of which he was a 2% share-holder. Following the corporation's
default on the obligations, judgments were entered against the debtor on his guarantees.
Thereafter, on the advice of counsel, and in furtherance of what the bankruptcy
court termed "bankruptcy estate planning with a vengeance," the
debtor liquidated most of his non-exempt assets and purchased, inter alia, an
annuity with a face value approximating $250,000. In finding that the debtor's
specific intent to put all of his rather substantial personal wealth beyond the
reach of his business creditors pursuant to the Minnesota exemption scheme did
not void the exemption of the debtor's annuity interests, the Johnson court recognized that "[t]he
gut level difficulty with the case at bar stems both from the massive amounts
of money involved and from debtor's status as an affluent physician enjoying
sound professional status, excellent current income, and unlimited future
earning potential." Nevertheless, the Johnson court denied the bankruptcy
trustee's motion to deny the debtor a discharge. According to the court:
. . . what is truly blame-worthy about a debtor's
intentional resort to "bankruptcy estate planning," standing alone?
From a purely legal perspective, and only in the context of an objection to
discharge, the answer is "nothing"-at least where the debtor has not
perpetrated actual fraud on a creditor, creditors, receiver, trustee, or other
party in interest during the process. . . . The case law in this Circuit has
long recognized the principle noted in the legislative history-that the
pre-petition conversion of non-exempt assets to an exempt form is not
fraudulent per se. . . .43
Therefore, annuities need not necessarily
further retirement purposes to fall within the current exemption schemes,
although obviously a more moving argument can be made for the exemption of such
an asset where it does so.
Conclusion
Even in those states that have generous
exemptions for the cash surrender value of life insurance or the right to
receive an annuity, the efficacy of any asset protection planning and
pre-bankruptcy planning will likely turn on the court's perception of the
debtor's purpose in holding the life insurance or annuity contract, even if the
acquisition of such an asset did not constitute a fraudulent conveyance. While
the law governing the extent to which pre-bankruptcy or asset protection
planning is a permissible exercise of simple prudence is outside the scope of this
article, consideration should be given to the gulf between the typical
no-consideration transfer and planning for the conversion of non-exempt assets
into cash surrender value life insurance and annuities. Since there are
numerous reasons for effecting the latter that have nothing to do with avoiding
an individual's creditors, the finding of an intent to hinder, delay or defeat
creditors is probably unlikely except in the most egregious transactions.
Moreover, even where the ultimate resolution of whether a life insurance policy
or annuity contract remains in doubt, such conversions may in the end, provide
a debtor with the additional leverage he or she needs to force a settlement
with his or her creditors at something less than the full value of their claims.
Reprinted from RIAG's,
Journal of Asset Protection, with permission of the publisher, Research
Institute of America Group.
|
State Name |
Life Insurance Proceeds |
Annuity Proceeds |
Applicable Section(s) |
|
|
Beneficiary's interest in "proceeds
and avails" wholly protected from creditors of owner and insured. Owner's interest in "proceeds and
avails" wholly protected from creditors of insured if owner (or owner's
spouse) is insured, and spouse and/or children (or owner and/or children) are
beneficiaries. |
Maximum $250 per month of benefits under
all annuity contracts exempt from creditors. |
|
|
|
Owner's interest in up to $12,000 of value
of unmatured policy is exempt. Maximum interest of $420 per week of spouse
or dependent beneficiary is exempt. |
Owner's interest in up to $12,000 of value
of unmatured policy is exempt. |
8 § 95.030. |
|
|
Maximum interest of $20,000 of spouse or
child beneficiary in death benefit is exempt. Owner's interest in up to $25,000 of cash
surrender value is exempt if (i) policy held for at least two years and (ii)
spouse, child, parent, sibling, or other dependent family member is
beneficiary. Beneficiary's interest in proceeds wholly
protected from creditors of owner. |
Exempt only if qualified under Code
§§ 401(a), 403(a), 403(b), 408, or 409. |
Ariz. Rev. Stat. §§ 20-1131 and
33-1126(A)(1) and (6), and (C) |
|
|
Note: |
||
|
|
Unmatured policy wholly exempt from
creditors; provided, however, that loan value of only $8,000 ($16,000 if
debtor married) is exempt. Death benefits exempt to extent reasonably
necessary for support of debtor, and spouse and dependents of debtor. |
Unmatured policy wholly exempt from
creditors. |
|
|
|
Interest in up to $50,000 of cash surrender
value (except for increase attributable to previous 48 months contributions)
exempt from creditors of insured except where beneficiary is estate of
insured. Death benefit payable to beneficiary (other
than estate of insured) wholly exempt from creditors of insured. |
None. |
Colo. Rev. Stat. §§ 13-54-102(1)(l) and
(s). |
|
|
Interest of beneficiary (other than
insured) in proceeds wholly protected from creditors of insured. Interest of owner of unmatured policy in up
to $4,000 of accrued interest or dividend, or loan value, is exempt provided
insured is owner or person upon whom owner is dependent. |
Only if ERISA qualified. |
Conn. Gen. Stat. §§ 13-54-102(s), 38a-453
and 52-352b(s) |
|
|
Beneficiary's interest in "proceeds
and avails" wholly protected from all creditors. |
Maximum $350 per month of benefits under
all annuity contracts exempt from creditors. |
Del. Code Ann. Tit. 18 §§ 2725 and 2728 |
|
|
Maximum exemption of $200 per month for a
beneficiary providing principal support of a family or $60 per month for a
beneficiary not providing principal support of a family. |
Maximum exemption of $200 per month for a
beneficiary providing principal support of a family or $60 per month for a
beneficiary not providing principal support of a family. |
D.C. Code Ann. § 15-503 |
|
|
Beneficiary's interest in proceeds wholly
protected from insured's creditors unless policy payable to insured or his estate.
Owner's interest in cash surrender value
wholly exempt. |
Interest in proceeds of policy wholly
exempt. |
|
|
|
Owner's interest in unmatured policy
(except credit life insurance) wholly exempt; provided that only $2,000
maximum accrued dividend or interest, or loan or cash value, exempt (provided
insured is debtor or individual upon whom debtor dependent). Beneficiary's interest in death benefit
exempt to extent reasonably necessary for support or debtor and dependent if
insured was individual of whom debtor was a dependent. |
Proceeds of policy exempt to extent
reasonably necessary for support of debtor and dependents |
|
|
|
Proceeds and cash value payable to
insured's spouse, child, parent or other dependent is wholly exempt from
insured's creditors. |
Proceeds payable to spouse, child, parent
or other dependent is wholly exempt from insured's creditors. |
Haw. Rev. Stat. § 431:10-232 |
|
|
Beneficiary's interest in "proceeds
and avails" wholly protected from all creditors. |
Maximum $1,250 per month of benefits under
all annuity contracts exempt from creditors. |
|
|
|
Proceeds and cash value payable to
insured's spouse, child, parent or other dependent is wholly exempt from
insured's creditors.
|
Proceeds payable to spouse, child, parent
or other dependent is wholly exempt from insured's creditors. |
215 |
|
|
If contract so provides, benefits payable
to person other than person effecting policy are wholly exempt from
creditors. |
If contract so provides, benefits payable
to person other than person effecting policy are wholly exempt from
creditors. |
Ind. Code § 27-2-5-1 |
|
|
Interest in accrued dividend or interest,
or loan or cash surrender value, wholly exempt if beneficiary is spouse,
child or dependent; provided that increases attributable to prior two years
limited to $10,000. Maximum $15,000 of death benefit exempt if
payable to spouse, child or dependent. |
Proceeds wholly exempt except for payments
resulting from excessive contributions within prior year. |
|
|
|
Policy and its reserves, or their present
value, wholly exempt from claims of all creditors unless purchased within
past year. |
Annuities qualifying under certain |
|
|
|
Beneficiary's interest in "proceeds
and avails" wholly protected from all creditors. Owner's interest in policy wholly exempt. |
Maximum $350 per month of benefits under
all annuity contracts exempt from creditors. |
Ky. Rev. Stat. Ann. §§ 427.110(1),
304.14-300 and 304.14-330 |
|
|
Interest of beneficiary (including estate
of insured) in "proceeds and avails" wholly protected from all
creditors. |
Interest in proceeds of policy wholly
protected from all creditors; provided that maximum $35,000 exempt if
bankruptcy filed within nine months of policy issuance. |
La. Rev. Stat. Ann. § 22:647 |
|
|
Beneficiary's interest in "proceeds
and avails" wholly protected from all creditors. Owner's interest in unmatured policy
(except credit life insurance) wholly exempt; provided that only $4,000
maximum accrued dividend or interest, or loan value, exempt (provided insured
is debtor or individual upon whom debtor dependent). |
Maximum $450 per month of benefits under
all annuity contracts exempt from creditors |
Me. Rev. Stat. Ann. Tit. 24-A, §§ 2428 and
2431, Tit. 14 §§ 4422(10) and (11). |
|
|
Proceeds wholly exempt if payable to the
spouse, child, or dependent relative of the insured. |
Proceeds wholly exempt if payable to the
spouse, child, or dependent relative of the insured. |
Md. Code Ann., Ins. § 16-111 |
|
|
Beneficiary's interest in
"proceeds" wholly protected from creditors of owner. |
None. |
Mass. Gen. Laws ch. 175 § 125 |
|
|
Proceeds (including cash value) wholly
exempt from creditors. |
Proceeds wholly exempt. |
|
|
|
Proceeds wholly exempt from creditors of
person effecting the policy. Maximum $20,000 of proceeds payable to a
spouse or child is exempt from other creditors (increased by $5,000 for each
dependent of the spouse or child). Maximum $4,000 interest in any accrued
dividend or interest, or loan value, exempt (provided insured is debtor or
individual upon whom debtor dependent). |
Proceeds wholly exempt from creditors of
person effecting the policy. |
|
|
|
Proceeds (including cash surrender and loan
value) wholly protected from creditors of insured; provided maximum $50,000
cash surrender or loan value exempt if from premiums paid in past twelve
months. |
Exempt to extent reasonably necessary
for support of debtor and dependent if on account of illness, disability,
death, age, or length of service and qualifies under Code §§ 401(a), 403(a),
403(b), 408, or 409. |
|
|
|
Owner's interest in unmatured policy
(except credit life insurance) wholly exempt; provided that only $150,000
maximum accrued dividend or interest, or loan value, exempt (and provided
insured is debtor or individual upon whom debtor dependent). |
Exempt to extent reasonably necessary for
support of debtor and dependents provided benefits are by reason of age,
illness, disability, death or length of service. |
Mo. Rev. Stat. §§513.430(7), (8) and
(10)(e). |
|
|
Beneficiary's interest in "proceeds
and avails" wholly protected from creditors of owner and insured. Maximum $4,000 in value of unmatured life
insurance contract is exempt. |
None. |
|
|
|
Maximum $10,000 of proceeds, cash value,
and benefits exempt from insured's creditors (unless beneficiary is estate of
insured); also exempt from beneficiary's creditors if beneficiary related by
blood or marriage to insured. |
Maximum $10,000 proceeds of policy exempt. |
Neb. Rev. Stat. §§ 44-371 |
|
|
Beneficiary's interest in "proceeds
and avails" wholly protected from all creditors. Owner's interest in all money, benefits,
privileges or immunities, exempt to extent premium not in excess of $1,000
per year. |
Maximum $350 per month of benefits under
all annuity contracts exempt from creditors. |
Nev. Rev. Stat. §§ 21.090(1)(k), 687B.260
and 687B.290 |
|
|
Beneficiary's interest in proceeds wholly
protected from creditors of person effecting policy unless policy payable to
insured's estate. |
None. |
N.H. Rev. Stat. Ann. § 408:2 |
|
|
Beneficiary's interest in "proceeds
and avails" wholly protected from all creditors provided beneficiary is
not owner or insured. |
Maximum $500 per month of benefits under
all annuity contracts exempt from creditors. |
N.J. Stat. Ann. §§ 17B:24-6 and 17B:24-7 |
|
|
Cash surrender value and withdrawal value
wholly exempt from all creditors. |
Proceeds of policy wholly exempt from all
creditors. |
N.M. Stat. Ann. §§ 42-10-3 and 42-10-5 |
|
|
Beneficiary's interest in "proceeds
and avails" wholly protected from all creditors provided beneficiary is
not owner or insured. Owner's interest in proceeds and avails of
policy insuring another is exempt as against creditors of insured (and
owner's own creditors if insured is owner's spouse). |
Court has discretion to order "just
and proper amount" paid to creditors with due regard to reasonable requirements
of debtor and dependent family; provided maximum $5,000 exempt if annuity
purchased within prior six months. |
N.Y. Ins. Law § 3212; N.Y. Debtor &
Creditor Law § 283. |
|
|
Beneficiary's interest in
"proceeds" wholly protected from creditors of insured provided
beneficiary is not owner or insured. |
Only individual retirement annuity under
Code § 408 is exempt. |
N.C. Const. § 5; N.C. Gen. Stat. §§ 1C-1601
and 58-58-115 |
|
|
Maximum exemption of proceeds or cash
surrender value of $100,000 per policy and $200,000 aggregate (unless more is
reasonably necessary for the support of insured and dependents), provided
payable to spouse, children, or any dependent relative. |
Maximum exemption of $100,000 per policy
and $200,000 aggregate (unless more is reasonably necessary for the support
of insured and dependents), provided payable to spouse, children, or any
dependent relative. |
N.D. Cent. Code § 28-22-03.1 |
|
|
"Proceeds and avails" wholly
protected from creditors of insured provided beneficiary is spouse, child or
dependent. |
Wholly protected from creditors of
annuitant provided beneficiary is spouse, child or dependent. |
Ohio Rev. Code Ann. § 3911.10 |
|
|
Policy proceeds and cash values wholly
protected from all creditors. |
Wholly protected from all creditors. |
|
|
|
Beneficiary's interest in
"proceeds" wholly protected from creditors of insured provided
beneficiary is not owner or insured. Owner/insured's interest in cash value
wholly exempt provided beneficiary is not owner/insured's estate. |
Maximum $500 per month of benefits under
all annuity contracts exempt from creditors. |
Or. Rev. Stat. §§ 743.046 and 743.049 |
|
|
Proceeds payable to spouse, child or
dependent relative of insured wholly exempt from creditors of insured. Proceeds exempt from own creditors to
extent necessary to provide for maximum income or return of $100 per month. |
Proceeds payable to spouse, child or
dependent relative of insured wholly exempt from creditors of insured. Proceeds exempt from own creditors to
extent necessary to provide for maximum income or return of $100 per month. |
42 |
|
|
Beneficiary's interest in "proceeds
and avails" wholly protected from creditors of insured provided
beneficiary is not owner or insured. |
Only individual retirement annuity under
Code § 408(b) is exempt. |
R.I. Gen. Laws §§ 9-26-4(11) and 27-4-11 |
|
|
Beneficiary's interest in proceeds and cash
surrender values wholly protected from creditors of insured provided
beneficiary is spouse, child or dependent of insured. Maximum $4,000 exemption for owner's interest
in accrued dividend or interest under, or loan value of, unmatured policy
under which insured is debtor or individual of whom debtor is dependent. |
Exempt if on account of illness,
disability, death, age, or length of service and qualifies under Code §§
401(a), 403(a), 403(b), 408, or 409. |
S.C. Code Ann. §§ 14-41-30(8),
15-41-30(10)(E) and 38-63-40 |
|
|
Maximum $10,000 exemption for proceeds
payable to estate or maximum $20,000 exemption for proceeds payable to spouse
or children. |
Maximum $250 per month of benefits under
all annuity contracts exempt from creditors. |
S.D. Codified Laws §§ 43-45-6, 58-12-4,
58-12-6 and 58-12-8 |
|
|
Beneficiary's interest in amounts payable
under policy wholly protected from creditors of insured provided beneficiary
is spouse, child or dependent relative of insured. |
Beneficiary's interest in amounts payable
under policy wholly protected from creditors of insured provided beneficiary
is spouse, child or dependent relative of insured. |
|
|
|
Policy proceeds and cash values wholly
protected from all creditors (subject to disagreement among courts as to
interpretation and interaction of statute). |
Policy proceeds wholly exempt from all
creditors. |
|
|
|
Exemption for proceeds or benefits paid to
a spouse or dependent upon death of insured to extent reasonably necessary
for support of beneficiary and dependents. Maximum $5,000 exemption for owner's
interest in unmatured life insurance |
Assets held and proceeds paid to extent
reasonably necessary for support of beneficiary and dependents. |
|
|
|
Owner's interest in unmatured policy
(except credit life insurance) wholly exempt. Beneficiary's interest in payment under
policy insuring life of individual on whom debtor was dependent wholly
exempt; otherwise exempt from creditors of owner and insured only. |
Maximum $350 per month of benefits under
all annuity contracts exempt from creditors. |
|
|
|
Beneficiary's interest in proceeds wholly
protected from creditors of owner and insured, provided that beneficiary is
not owner or insured. |
None. |
|
|
|
Beneficiary's interest in "proceeds
and avails" wholly protected from all creditors. |
Maximum $250 per month of benefits under
all annuity contracts exempt from creditors. |
Wash. Rev. Code §§ 48.18.410 and 48.18.430 |
|
|
Beneficiary's interest in "proceeds
and avails" wholly protected from all creditors of owner and insured,
provided that beneficiary is not owner or insured. |
None. |
W. |
|
|
Maximum $4,000 exemption for debtor/owner's
interest in unmatured policy (other than credit life insurance), if debtor,
dependent, or individual of whom the debtor is a dependent is insured. Beneficiary's interest in payment under
policy insuring individual of whom debtor was dependent is exempt to extent
reasonably necessary for support of debtor and dependents. |
Wholly exempt provided benefits are
by reason of age, illness, disability, death or length of service. |
|
|
|
Beneficiary's interest in
"proceeds" wholly protected from all creditors of owner and
insured, provided that beneficiary is not owner or insured. |
Maximum $350 per month of benefits under
all annuity contracts exempt from creditors. |
|
Although the authors have attempted to
interpret and reflect the most current and appropriate statutory authority,
planners are urged to refer to the current statutes and court decisions in
their jurisdictions.
The foregoing exhibit
was updated as of October 2003.
1 The Bankruptcy Code is codified at 11 U.S.C. sections
101, et seq.
2 Section 522(b) of the Bankruptcy Code provides the
states with the authority to substitute their own exemption schemes for the
federal exemption scheme set out in section 522(d) of the Bankruptcy Code.
3 For an in-depth analysis of the creditor protections
afforded retirement plans and individual retirement accounts, see Rothschild
and Alliotts, "Protecting Retirement Plans," 2 JOAP 35, (March/April
1997).
5 11 U.S.C. section 522(d)(7).
6 11 U.S.C. section 522(d)(8) states that the exemption
is only $8,000. Pursuant to 11 U.S.C. section 104(b), however, this amount is
subject to periodic adjustment by detailed formula for inflation.
7 11 U.S.C. section 522(d)(B). The exempt amount is
reduced by amounts taken by an insurance company to pay premiums or carry out a
non-forfeiture option if such option is automatic under the policy
8 11 U.S.C. section 522(a)(1).
9 S.C. Code Ann. § 15-41-30(8).
10 S.C. Code Ann. § 38-63-40(A).
11
12
15
16
17 N.Y. Insurance Law § 3212; See also, N.Y. Civil
Practice Law and Rules § 5205(i).
18 N.Y. Insurance Law § 3212(b).
19 40 F.Supp. 616 (SD N.Y., 1941).
20 N.Y. Insurance Law § 3212(a)(2).
21 28 Bkrptcy Rptr. 736 (Bkrptcy. WD Ky, 1983).
22
24 See, e.g., In re
White, 185 FSupp. 609 (N.D.
27 See Rothschild, "Coming in From the Cold-Estate
Planning Using
28 10 Bkrptcy. Rptr. 101, (Bkrptcy. D
29 106 Bkrptcy. Rptr. 220 (Bkrptcy. D
30 42
31 Mo. Ann. Stat. § 513.430(10)(e).
32 N.Y. Insurance Law § 3212(d)(l).
33 N.Y. Insurance Law § 3212(d)(2).
34 177 Bkruptc.. Rptr. 437 (Bkrptcy. ND N.Y., 1994).
35 986 F.2d 436 (CA-11, 1993).
36 153 Bkrptcy. Rptr. 357 (Bkrptcy. SD
37 186 Bkrptcy. Rptr. 535 (Bkrptcy. SD
38 172 Bktptcy. Rptr. 119 (Bkrptcy. MD
39 Bkrptcy. Rptr. 436 (Bkrptcy. SD
41 35 Bkrptcy. Rptr. 368 (Bktptcy. SD
42 80 Bkrptcy. Rptr. 953 (Bkrptcy. D