by John Darer® CLU ChFC MSSC RSP CLTC
Structured settlement creditor protection is often cited as one of the benefits of structured settlements. In this blog we take a closer look at structured settlement creditor protection, creditor protections for annuities in general and whether such creditor protections apply to "secondary market annuities"
How are Florida Structured Settlement Payees protected from claims of creditors?
The 2017 Florida Statutes provide the following:
222.14 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.
Windsor‐Thomas Group Inc. v. Parker , 782 So.2d 478 (Fla. 2d DCA 2001). Florida District Court of Appeals held that the structured annuity issuer had standing to raise the statutory prohibition against garnishment.
Mc Collam v. LeCroy, 612 So. 2d 572 (1993). Florida Supreme Court held that an annuity contract awarded to the debtor by a defendant to fund a structured settlement of a personal injury case was exempt. The creditor argued that the annuity contract did not qualify as an exempt annuity contract as being in substance a nonexempt structured settlement. The court noted that the statute does not define “annuity contracts” and hence it did not find the exemption limited to any particular types of annuity contracts, such as those based on the insurance of human lives.
Structured Settlement Creditor Protection in Other States
In re Paul William Orso, Debtor. Valerie Canfield, Appelant v Paul William Orso and Martin A. Schott Appellees, 283 F.3d 686 (5th Cir. 2002) affirmed the bankruptcy and district courts' conclusion that the annuity payments in question ( compensation from 1989 settlement for injuries sustained by Orsi in 1986 automobile accident) are exempt from seizure by ex-wife (from whom he was divorced in 1991), and thus exempt from claims asserted by Creditor-Appellant Valerie Canfield in Debtor-Appellee Paul William Orso's bankruptcy proceedings.
in re Meyer, 2010 WL3369375 (Bankr. D. Minn. 8/25/10) (O’Brien, J.) Minnesota bankruptcy judge overruled a bankruptcy trustee and found that future payments from the structured settlement were, in fact, payment and compensation for the bankruptcy debtor's loss of future earnings. 11 U.S.C. § 522(d)(11)(E) provides an exemption for “a payment in compensation of loss of future earnings...".
Swimlear v. Baker, 2009 WL 3644336 Court ruled favorably with an exemption for the structured settlement annuitant in New York case
However, Dallas bankruptcy attorney Bruce W. Akerly says that the protection is not that simple when filing for bankruptcy protection while receiving structured settlement payments. He says in his 2015 missive "The Impact of Bankruptcy on Structured Settlements", that "In most states, structured settlement payments are listed on Schedule B (personal property) and Schedule C (exempt property). A debtor must identify the payments as exempt to claim them as exempt; otherwise, the trustee or the creditors may seek to treat them as property of the bankruptcy estate".
Furthermore Akerly says "If a debtor fails to identify structured settlement payments in his/her bankruptcy schedules, then, once discovered, the case may be re-opened to allow the trustee to administer the payments, notwithstanding the granting of a discharge in bankruptcy, and payments that had been paid in the interim period may be require d to be returned to the bankruptcy estate. Furthermore, the debtor risks having the bankruptcy discharge set aside.
Structured Settlement where there is no annuity funding may not be exempt in bankruptcy in Florida
In re Dillon, 166 B.R. 766 (Bankr. S.D. Fla. 1994) illustrated the distinction between an exempt annuity contract purchased to fund a structured settlement and a mere structured settlement. In Dillon the judgment creditor agreed to make annual payments and did not purchase an annuity contract to effectuate the annual payments. The court held that the annual payments were not exempt proceeds of an “annuity contract” pursuant to §222.14,Unfunded structured settlement not exempt [Thanks to Miami bankruptcy lawyer Jordan E. Bublick for the cite]
Federal Bankruptcy Exemption For Annuities
Payments from an annuity on account of illness, disability, death, age, or length of service are exempt to the extent reasonably necessary for the support of the debtor and dependents. -- 11 U.S.C. § 522(d)(10)(E)
States With 100% Exemptions for Non IRA, Non ERISA Annuity Cash Value and Payments from Claims Of Owner's Creditors
Arizona Ariz. Rev. Stat. § 33-1126A7
Florida Fla. Stat. Ann. §222.14 (see above)
Georgia Georgia Code Ann. § 33-28-7
Hawaii Hawaii Rev. Stat. § 431-10-232
Illinois 100% for annuity payable to dependent -- I.L.C.S. § 5/12-1001(f)
Kansas 100% if held for more than one year Kan. Stat. Ann. § § 60-2313(a)(7), 40-414.
Louisiana 100% protected. -- La. Rev. Stat Ann. § 22:647(B). Limited to $35,000 if issued within 9 months.
Maryland Md. Code Ann. Ins. § 16-111(a)
Michigan Mich. Comp. Laws Ann. § 500.2207
New Mexico N.M. Stat. Ann. § 42-10-3
New York 100%, however, court may order that debtor pay creditor "just and proper amount" with "due regard for the reasonable requirements" of the debtor and dependents. -- N.Y. Ins. Law § 3212(d)
Ohio 100% for contracts payable to spouse, children or dependent. -- Ohio Rev. Code Ann. §§ 2329.66(A)(6)(b),
Oklahoma 6 Okla. St. Ann. § 3631.1
Tennessee 100% for net amounts payable to spouse, child or dependents. -- Tenn. Code Ann. § 56-7-203.
If you live in one of these states, before you get hustled into selling your structured settlement payments to some "Slick Rick" with a bag of dirty tricks for pennies on the dollar, think again. Maybe there is another alternative worth considering.
Do People Receiving Payments from a "Secondary Market Annuity" Enjoy the Same Creditor Protection?
Despite the marketing gimmick, secondary market annuities are not annuities. Certain intermediaries and some settlement planners have peddled structured settlement payment rights as an annuity, even though it is not an annuity. The question is do structured settlement derivative investments have the same creditor protection as a legitimate structured settlement, independent of whether they are acquired by a domestic asset protection trust?
Consider this, when a personal injury or wrongful death law suit is settled and part of the consideration for the settlement of a lawsuit:
1. The plaintiff does not buy any annuity, the plaintiff agrees to receive part of the consideration in the form of periodic payments.
2. The periodic payment obligation is assigned to a qualified assignment company. The qualified assignment company is the applicant, buyer and owner of the annuity contract it uses to fund its obligation. Nothing changes about that if an annuitant chooses to sell their structured settlement payment rights to a factoring company and the factoring company "lays off" the structured settlement payment rights to a structured settlement investor. It gets even more convoluted when you have intermediaries like SMA Hub, who take the assignment of payment rights into a business trust and then sell them off to investors.
Certain states like Delaware specifically provide that when the formation of the trust predates the wedding, the future ex-spouse has no claim against the trust property. A caution by New York lawyer Daniel S. Rubin is cited in this 2012 Forbes article "The laws of some, but not all, domestic asset protection trust states, provide that a claim for alimony cannot be enforced against a trust that was created prior to marriage. He notes, however, that these laws do not necessarily preclude the income of the trust from being considered in determining the appropriate alimony award".
Further exploration of this topic is needed.