Like many other products, annuities seem to go in and out of fashion. They're the ugly stepchild of the investment world, an ungainly hybrid of investment plan and insurance policy, with an odd mixture of advantages and disadvantages. One advantage that's often touted is their ability to shelter your retirement savings from potential seizure by creditors. That's true up to a point, but it is still possible for a judgment to take money from an annuity.
Annuities were designed to give the insurance industry its own investment product for retirement planning. In some ways, it's the flip side of a life insurance policy: it pays out an income for the rest of your life, instead of a lump sum after you are dead. Like an insurance policy, an annuity contract allows you to name a beneficiary to receive the contract's funds in the event of your death. This allows the money to pass to your heirs without the costs and delays of probate, and also allows the annuity to share in the creditor protection afforded to life insurance policies.
Many of your assets are protected from seizure by creditors. The general intent of the law is to protect you and your dependents from becoming destitute, and therefore a burden on the state. Laws protect the death benefit portion of your life insurance policies, a portion of the equity in your house, and such daily necessities as the tools of your trade, your clothes and your childrens' schoolbooks. Retirement plans are protected under these laws, though with many restrictions and exemptions. A portion of your annuity savings can usually be protected from judgments, under those provisions.
There are a few exceptions to those laws. For example, if someone brings a lawsuit against you, you can't simply purchase an annuity and use it to shelter your assets against a judgment. That's a blatant attempt to "game" the system and would be slapped down. The same holds true in the event of a bankruptcy. Most states require you to hold an annuity for a specific period before the suit to gain any protection. A few states protect the full value of your annuity, but most do not.
A Moving Target
Most states evaluate whether the annuity is vital to your family's well-being and to what extent. Essentially, they'll allow you enough to live but not to enjoy an affluent lifestyle. Changes to federal and state legislation, and developments in the applicable case law, make this kind of planning a moving target. If your broker blandly assures you that buying an annuity protects your assets from seizure, be sure to clarify the details with your accountant or lawyer. Salespeople don't always have a good grasp of the subtleties of your financial situation or your state's creditor laws.
Fred Decker is a trained chef and certified food-safety trainer. Decker wrote for the Saint John, New Brunswick Telegraph-Journal, and has been published in Canada's Hospitality and Foodservice magazine. He's held positions selling computers, insurance and mutual funds, and was educated at Memorial University of Newfoundland and the Northern Alberta Institute of Technology.