Unraveling the mysteries of the Florida exemptions for life insurance and annuity contracts.

• Author: Gopman, Jonathan E.
• Position: Part 2

This is the second installment of a two-part article that provides a detailed analysis of the creditor exemptions available under Florida law for life insurance policies and annuity contracts. Part one of this article, in the December 2008 issue, examined several aspects of these exemptions, including the application of the exemption to the proceeds received under a policy because of the insured's death, structural issues regarding the ownership of life insurance, the ability of a debtor to access the cash surrender value of a policy without forfeiting the benefit of the exemption, and the meaning of the term "annuity contract."

This final installment discusses one more structural issue related to annuity contracts, that is, does the exemption for the proceeds of an annuity contract apply to deferred annuity arrangements. This issue is important to consider in a period in which insurance companies provide a wide variety of financial products, including several variations of insurance and annuity products, in an effort to remain competitive in the market and offer flexible and attractive investment vehicles to savvy modern investors. This installment also examines the application of the exemption for annuity contracts to traditional estate planning arrangements such as charitable remainder trusts, grantor retained interest trusts and third-party, non-self-settled trusts. Finally, this installment of the article examines the application of the Florida fraudulent conversion rule to the life insurance and annuity exemption under [section]222.14.

Exemption for Proceeds of Annuity Contract Held to Apply to Deferred Annuities: Section 222.14 does not provide a definition of "proceeds." However, case law has been favorable to debtors. For example, the exemption for the "proceeds" of an annuity contract was held to apply to single premium deferred annuities in the case of Goldenberg v. Sawczak, 791 So. 2d 1078 (Fla. 2001). In Goldenberg, Dr. Goldenberg (the debtor) had performed gall bladder surgery on Sawczak (the creditor). The creditor subsequently filed suit against the debtor for malpractice. The debtor filed a petition under Ch. 7 of the Bankruptcy Code on the same day that jury deliberations were scheduled in the malpractice case filed by the creditor. The creditor was granted an emergency motion for relief from the bankruptcy automatic stay so that the malpractice trial could be completed. The creditor obtained a judgment against the debtor in the amount of $4,000,629. On the schedules attached to the bankruptcy petition, the debtor listed assets totaling $3,791,119, of which the debtor claimed $3,751,678 as exempt. Included in these exempt assets were seven commercial annuity contracts with a combined value of $355,894 that the debtor had obtained well in advance of the litigation.

The commercial annuities were single premium deferred annuities. The contracts provided that the single premium of each annuity accumulated interest until the maturity date, at which time certain sums would become payable to the annuitant or his survivors under various settlement options. The annuities also allowed for the surrender of the contract in exchange for a designated lump sum payment. The surrender value was affected by the timing of when the annuity contract was surrendered. The earlier the annuity contract was surrendered, the higher the surrender penalty. The debtor was both the owner and annuitant of the annuities.

The debtor's case worked its way through the bankruptcy system until the U.S. Court of Appeals for the 11th Circuit was faced with the question whether the cash surrender value of the annuity contracts was exempt as proceeds under [section]222.14. The 11th Circuit declined to express an opinion on the issue, and certified the following question to the Florida Supreme Court: "Are the cash surrender values of [debtor]'s annuity contracts exempt from legal process under Fla. Stat. Ann. [section]222.14 (West 1998)?"

The creditor argued that [section]222.14 exempts only the proceeds of annuity contracts (which the creditor took to mean only those payments made as an annuity, that is, payments made after maturity) and did not include withdrawals from the cash surrender value. (1) The Florida Supreme Court rejected the creditor's argument. According to the Supreme Court:

The terms of section 222.14 are clear.... Sawczak would have us define the term "proceeds" to include only those payments that commence at the maturity date of Goldenberg's policies. In other words, Sawczak maintains that moneys received by surrendering an annuity contract are not proceeds. We do not find a basis for such a narrow definition of "proceeds" in the statute or in the...