If the beneficiary of the insurance is the insured’s spouse, child, or other dependent relative, the Cash Value is free from claims of the insured’s creditors.
Can life insurance cash value be garnished?
Writ of Garnishment: an order directing a third party to withhold some sort of property (typically money) belonging to the defendant (also known as the “garnishee” or “judgment debtor”) for delivery to a creditor to whom they owe an outstanding obligation.
The Michigan Court of Appeals (COA) reversed and remanded a writ of garnishment that had been upheld by the lower court following a request to quash due to trial court error in DC Mex Holdings LLC v Affordable Land LLC (Docket 332489).
Facts: On October 7, 2013, plaintiff DC Mex Holdings, LLC was awarded a $2,500,000 judgment jointly and severally against defendant Affordable Land, LLC, and defendant-appellant Dale B. Fuller. After the judgment was upheld on appeal, DC Mex requested a writ of non-periodic garnishment, naming Prudential Insurance Company of America as the garnishee because Fuller had an individual life insurance policy with a cash value of $73,078.91 from Prudential.
According to Prudential’s response, “ife insurance may be immune from garnishment under” MCL 500.2207. Fuller claimed that the monies were tax-exempt, and that the monetary value was not owed or represented an obligation. DC Mex did not argue that MCL 500.2207 exempted life insurance proceeds, including the cash value, but the exemption only applied after the money became available (i.e., after the insured’s death), according to DC Mex’s interpretation of MCL 500.2207.
The trial court denied Fuller’s challenge to the writ of garnishment, relying on the plain wording of MCL 600.6104(3), which allows for the fulfillment of a judgment out of any property, liquidated or unliquidated, that is not exempt.
Analysis: The exemption at issue on appeal is governed by MCL 500.2207(1), which provides in relevant part:
“Any proceeds of a life or endowment insurance policy payable to the insured’s wife, husband, or children, or to a trustee for the benefit of the insured’s wife, husband, or children, including the cash value thereof, will be free from execution or responsibility to any of the insured’s creditors;”
The COA examined the history of that section of the statute back to the 1800s in order to interpret it. Over time, the language exempting the proceeds has remained constant. In Equitable Life Assurance Society of the United States v Hitchcock, 270 Mich 72, 80; 258 NW 214, the court went into great detail (1935). According to the Equitable Life Court, the Act was then changed to include the following clause:
“And the proceeds of any life or endowment insurance policy payable to the insured’s wife, husband, or children, including their monetary value, shall be free from execution or liability to any of the insured’s creditors.”
The funds of the policy, whether a death benefit or cash value, are excluded under MCL 500.2207, according to this Court (1). The Court noted that it had previously explained that “in regards to life insurance contracts, the general public policy is to protect the insurance taken out by a person for the maintenance and support of the person’s spouse and children from claims of creditors after the person’s death,” and that “MCL 500.2207(1)… provides evidence of the Legislature’s intent as to this public policy.” 174 Mich App 180, 182-183; Baltrusaitis v Cook, 174 Mich App 180, 182-183; Baltrusaitis v Cook, 174 Mich App 180 (1988).
When DC Mex filed its complaint in October 2011, the beneficiary of Fuller’s life insurance policy was a revocable trust, the beneficiaries of which were Fuller’s surviving children. In 2013, he transferred the beneficiary to his daughter, who is his sole child. The trust, according to DC Mex, was not exempt.
This argument ignores the statute’s language, which states that “the proceeds of any life or endowment insurance policy payable to the insured’s wife, husband, or children, or to a trustee for the benefit of the insured’s wife, husband, or children, including the cash value thereof, shall be exempt…”
Life insurance plans payable to a trustee for the benefit of the children are plainly exempt.
The court determined that the cash value of Fuller’s life insurance policy was exempt from creditor execution, and that the trial court erred in refusing the application to quash the garnishment.
Does life insurance have creditor protection?
- For business owners, self-employed individuals, and professionals, creditor protection is critical.
- Creditor protection can be obtained through life insurance and other insurance products such as annuities and segregated funds.
- There is no guarantee that creditors will be protected. Creditors can confiscate your assets in a variety of situations.
- It is critical to plan ahead of time in order to enhance your chances of preserving your possessions from creditors.
Can creditors go after life insurance policies?
To pay off debts, creditors can’t usually go after assets like retirement accounts, living trusts, or life insurance payouts. These assets are distributed to the named beneficiaries and are not included in the probate process.
What debts are forgiven at death?
What Types of Debts Can Be Forgiven When You Die?
- Debt that is secured. If the dead had a mortgage on her home when she died, whoever inherits the property is accountable for the debt.
- Debt that is not secured. Any unsecured debt, such as a credit card, can only be paid if the estate has sufficient assets.
What states protect annuities from creditors?
Annuities are shielded from seizure by creditors or the bankruptcy court in several states. Creditors are prohibited from seizing money held in an annuity or a cash value life insurance policy in some states, such as Florida and Texas.
These statutes are in place in these two states to safeguard the vast number of seniors who live in both states and rely on annuity income to support their living expenses.
Exemption from seizure in the remaining states of the union varies from case to case, depending on the circumstances. Annuity contracts in some states have limited or no creditor protection.
In fact, an annuity that qualifies in one state may not be qualified in another due to a term difference. Those terms could include whether the annuity includes a qualifying event that makes it eligible or if the annuity’s series of payments surpass a certain amount set by state law.
Florida and Texas Have Strong Annuity Creditor Protections
We’ll focus on Florida and Texas, where annuities are generally shielded from creditors’ seizure under any conditions.
“Exemption from legal process for the cash surrender value of life insurance policies and annuity contracts.” The cash surrender values of life insurance policies issued on the lives of citizens or residents of the state, as well as the proceeds of annuity contracts issued to citizens or residents of the state, in any form, shall not be subject to attachment, garnishment, or legal process in favor of any creditor of the person whose life is so insured or any creditor of the person who is the beneficiary of such annuity contract, unless the insurance policy or annuity contract expressly states that they are.
This statute expressly says that all money held in any type of annuity contract (fixed, fixed indexed, or variable) is absolutely immune from creditors’ seizure.
As a result, many doctors and other high-income earners invest all of their non-qualified investments and cash (apart from IRAs and employer-sponsored retirement plans) in annuities. They may maintain some liquid cash in the bank, but that is about it for most of them.
Texas has a set of statutes that are nearly as strong as Florida’s when it comes to annuity exemption from creditors. To put things in perspective, prior to his most recent sentence, O.J. Simpson was living off of money he had invested in annuities.
The plaintiffs in the civil complaint brought against him sought a large sum of money from him, but not the money he had in his annuity contracts.
Federal Bankruptcy Exemptions for Annuities
There may be some federal exemptions for annuities in bankruptcy cases. However, it is contingent on the conditions. On these topics, as well as advice for your specific case, you should consult your CPA or attorney.
Whether you pick state or federal annuity exemptions, your annuity can be exempted provided it fits the IRS tax code’s qualified retirement account standards, according to writer Carron Nicks of legal information source Nolo.
Nicks also notes that if your annuity was established with money from an IRA or some other non-qualified retirement plans, it may be eligible for a federal exemption. However, there are several limitations to this exception. For further details, see your CPA or attorney.
In addition to the retirement account exemption, the federal bankruptcy legislation also includes an exemption for an annuity that pays “on account of disease, incapacity, death, age, or duration of service,” according to Nolo. Section 522(d)(10)(E) of the federal bankruptcy code contains this clause.
Specific awards for bodily harm, wrongful death, or lost future wages are also subject to a number of exemptions. Exemptions comparable to these can be found in other states, according to Nolo.
According to Nolo, one of these exemptions might be utilized to safeguard an annuity supported by one of these awards. Those exemptions, however, will be subject to some restrictions.
Proactive Planning Makes a Difference
These money-protection rules are fantastic and can be extremely advantageous in the appropriate circumstances.
When it comes to asset protection methods based on these regulations, however, timing is crucial. You can’t make this strategy if you’ve already been sued or if a lawsuit is about to be filed against you.
In other words, you must have a plan in place to preserve your assets before these occurrences occur. That is why it is critical to plan ahead of time.
If you’re worried about how to protect your assets, make an appointment with your CPA or attorney as soon as possible. They can talk about whether this type of plan is good for you, as well as the benefits and drawbacks.
General information about annuities and creditor protection can be obtained from your financial advisor. However, it’s important to remember that they can’t provide you precise advice in these cases.
However, once you have a clear understanding of the strategy you want to pursue, their financial knowledge and skills can make all the difference in locating the correct annuity for you.
Exploring Options for Asset Protection
In the end, using an annuity to shield money from creditors should make sense for your financial condition and asset protection aims. Annuities are treated as retirement savings vehicles by the IRS. In this way, an annuity might be thought of as a pension-like vehicle.
If you have money or assets that you don’t want creditors to get their hands on, keep in mind that these instruments are primarily created for retirement purposes. As you consider your asset protection choices, your financial advisor can explain the ins and outs.
Is the beneficiary of life insurance responsible for debt?
If you’re the specified beneficiary on a life insurance policy, you have complete control over the funds. Unless the loan is also in your name or you cosigned for the obligation, you are not accountable for the debts of others, including your parents, spouse, or children.
Is life insurance considered part of an estate?
Ownership of the policy is often overlooked, but it is a crucial concern, especially in large estates. Regardless of who pays the insurance premiums or who is appointed beneficiary, death benefits from life insurance are usually included in the estate of the policy owner. The transfer of a life insurance policy’s ownership is a complicated process. An professional estate planner or insurance agent should be consulted about ownership provisions.
In Minnesota, for example, even if you transfer ownership of a life insurance policy within three years of death, the death benefits would very certainly be included in the original owner’s estate value. The new owner can also change the beneficiary, borrow against the policy, surrender or cancel it. If relationships are shaky or there is any doubt about the new owner’s skills or intentions, caution should be exercised while changing ownership.
Is life insurance creditor protected Canada?
Life Insurance and Creditor Protection So long as a specified beneficiary is in place, provincial legislation generally prohibits creditors of a policyholder from seizing the life insurance benefits upon the death of the life insured.