Can a creditor take your annuity? Annuities are not fully protected from creditors in Minnesota. Many people buy Annuities in order to have a regular income stream for life. In Minnesota, Annuities are treated the same as IRAs for protection outside of bankruptcy. The same can be said for pensions, IRAs, and other Non-ERISA plans. Minn. Stat. § 550.37 subd. 24 governs annuities and other retirement types of assets.
This statute provides that $69,000 of these types of assets can be protected. This is in the aggregate. You cannot protect $69,000 of each type of asset. If you have $70,000 in an IRA and $70,000 in an Annuity, your creditors can take $71,000 of that value. There are some other limitations however. The statute also provides for an exemption of “and additional amounts under all the plans and contracts to the extent reasonably necessary for the support of the debtor and any spouse or dependent of the debtor.”
This is always a dangerous position for you. A court will decide what your reasonable lifestyle should be. How much is reasonable to support your family? Is that likely to be an amount that allows your family to maintain their lifestyle? Or is it more likely to be just enough for the family to get by? You don’t have to expose your family to this risk completely.
These specific retirement accounts are not easy to protect beyond $69,000. With this in mind, the tax deferred benefits of contributing them should be weighed against how much is contributed. A tax benefit could benefit creditors more than you otherwise.
For assets like Annuities, there are several more options. Just like with other asset protection strategies in an integrated estate plan, you can distance yourself and ownership of these assets. You generally don’t want to transfer your IRA’s ownership to another person for many different reasons, but this is not the case for an Annuity.
Minn. Stat. § 61A.12 provides that if you name another person as the beneficiary of your Annuity or your life insurance, that person is entitled to the proceeds over your creditors. Proceeds are the death benefit for life insurance and the income stream after an Annuity reaches the annuitization phase. So, for annuities, that is the payments and any pay on death benefit. These can be protected from your creditors just by naming a beneficiary that isn’t you, but the cash value of the annuity is protected by either stripping it of its equity or the use of trusts.
Equity stripping involves pledging the annuity as collateral for a loan. This can work for a non-qualified annuity. There are significant tax consequences for protecting qualified annuities in this manner. It is generally not advisable.
Qualified annuities can be placed in a trust for the benefit of the beneficiary that isn’t you. If the trust is drafted properly, this will protect the cash value of the annuity from creditors and allow for the proceeds to still reach those that need them. Minnesota law especially favors this approach for spouses. The transfer of annuities to a spouse in trust is specifically mentioned in Minn. Stat. § 61A.12 subd. 2.
A trust can result in gift tax and other issues so this should be discussed with an integrated estate planning attorney. However, there are strategies to protect these assets in Minnesota. Always remember, that the most tax efficient strategy likely has a weakness when it comes to protecting your assets. You can’t protect your assets from every risk, but you can plan to protect most of your money. It is important to understand what is exposed before you make a major purchase or decision. A well implemented Asset Protection plan can mitigate many of these risks.