Advanced Underwriting Consultants

Question of the Day – March 28

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: My client is likely to declare bankruptcy, and wants to know whether his life insurance and annuity cash values are assets he will be able to keep.

Answer: In the asset protection and bankruptcy areas as they pertain to life insurance and annuities, there are few general questions that can be answered in the absolute.

Each state has its own rules about whether life and annuity contract values can be reached by the policyowner’s creditors.  Some states, such as Arkansas, provide no creditor protection for life and annuity cash values.  Others, such as Florida, provide unlimited protection.

There’s a tremendous resource summarizing each state’s rules at this website.

Even if a state says that the assets are exempt from creditors, there are certain situations where the “normal” rules may not apply—for example, if the client transfers assets to cheat creditors, or if the creditor is an ex-spouse or the IRS.

In a bankruptcy proceeding, the key question is whether the cash values are exempt assets.  If an asset is exempt, the client can keep it after being discharged from the bankruptcy proceeding.  Once again, the final answer as to whether life insurance or annuities are exempt depends on the rules that apply in the state where the bankruptcy is filed.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.