As far as annuities and life insurance are concerned, such policies are only exempt in some states. Even in states that protect these asset types, they are often only exempt if structured properly. In some states we must not only pay attention to who the policy’s insured person, owner, and beneficiaries are, but we must also examine the wording of the policy before we can say with any certainty that the policy is exempt. For example, Utah protects life insurance proceeds, but only if the beneficiaries are the insured person’s spouse or children. Alabama law protects life insurance from the claims of creditors of a policy’s beneficiary, but only if the beneficiary is someone other than the insured person and the policy states that the proceeds are exempt from creditor attachment. Not surprisingly, many insurance policies don’t include such protective language. To further muddy the waters, some states address to what extent cash proceeds are exempt from attachment, and other states don’t. If a state is silent on whether proceeds are protected, does that mean the policy is only safe from attachment before it’s converted to cash? How long are the proceeds safe after receiving them? If statutory law is silent, we must then look to case law, which of course will vary by state. In any case, to be as safe as possible we should never commingle insurance proceeds with other funds. They should be kept in a separate account so that they’re clearly identified and thus afforded the maximum protection under law.

Finally, we should consider fraudulent transfer law if planning is done after creditor threat has already materialized. Some states have adopted fraudulent conversion laws to specifically address whether transforming an exempt asset to a non-exempt asset in order to avoid creditors is fraudulent. If such is done after creditor threat has arisen, fraudulent conversion law (if a given state has such a law) tends to operate differently than fraudulent transfer law. This means that even if a transfer is not fraudulent under fraudulent transfer law, it may be fraudulent under fraudulent conversion law. In states with fraudulent conversion laws, whether a transfer is fraudulent will vary from state to state. For example, the purchase of a homestead in Florida, even if done to intentionally thwart creditors, cannot be undone as a fraudulent transfer or conversion. Nonetheless this may not be the case in other states.

Because the exemptions for annuities and life insurance are very state specific, one must be very careful when doing this type of planning. However, in a state that lacks fraudulent conversion laws, protects life insurance and/or annuities, and has no case law that sets precedent for undoing the purchase of a life insurance or annuity contract as a fraudulent transfer, life insurance/annuity exemption planning even after creditor threat has materialized may very well work.