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The ABCs of Bankruptcy: A is for Annuities

28 September 2012


Letter Block A

As a bankruptcy debtor’s attorney, one of the least welcome surprises is a non-exempt asset. Recently, I had a client come to me to file a bankruptcy with, among other assets, a “retirement annuity”. The summary of terms was straight-forward. She can’t draw from the annuity until she has held the annuity for more than ten years and she has reached the age of sixty-five, at which point she receives a fixed payment for life. So far, so good. As she’s entitled to claim federal exemptions, 11 U.S.C. § 522(d)(10)(E) protects exactly this kind of annuity and should work, right? Well, except for that one little word “unless” and paragraph (iii).

Fortunately, before filing, I reviewed the entire contract and found the word “non-qualified” on the dec sheet. Since her annuity was purchased with the proceeds of an investment account that had not previously been given protected status by the Internal Revenue Code under sections 401(a), 403(a), 403(b) or 408, she doesn’t get to exempt it. The designation of “retirement account” refers to the contractual relationship between the Debtor and her investment company, it does not entitle her to protection of that asset under the Internal Revenue or, alas, Bankruptcy Code.

A quick review of recent case law suggests I am not alone in my confusion or chagrin regarding annuity exemptions. The September 11, 2012 issue of West’s Consumer Bankruptcy News alone featured three cases regarding the exemption of annuities. In each case, it was state exemptions at issue. In Tober v. Lang, Trustee 22 CBN 878, WL 3241462 (9thCir. 8/10/12), the 9th Circuit permitted an exemption of the cash surrender value of an annuity where the beneficiary was Debtor’s adult daughter, because Arizona exemptions do not require a child be a dependent to protect the exemption. In In Re: Charles H. and Paula J. Wiley, 22 CBN 882, 469 B.R. 326 (Bankr. D. Idaho 4/3/12), Judge Pappas ruled that failure to set up a payment option meant the annuity had not been “annuitized” and was not exempt. According to his ruling, Idaho exemptions do not exempt annuities, only their benefits. “Mere ownership is not enough”. Some election of payments has to be made, even if the Debtor is not yet receiving them. Finally, in Silliman, Trustee, v. Cassell (In re Lou Ann Cassell), 22 CBN 886, 2012 WL 3136495 (11th Cir. 8/3/12), the 11th Circuit asked the Georgia Supreme Court to clarify its annuity exemption statutes before ruling on the case before it! How would you like to be the attorney advising a client on the security of that asset?

As practitioners, we become comfortable with our routines and tend to think we know the answers to most questions. The non-qualified annuity was a pointed reminder to second guess my first beliefs when my clients assets are on the line–and, of course, ALWAYS to review documents carefully before filing.

This article is part of a nationwide exercise where seasoned bankruptcy practitioners share their perspectives on the “A-Z of Bankruptcy”. To see what my other colleagues have to say about the Letter A, please see the comments below:


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