Creditors Rights in Life Insurance, Annuities and IRAs Non-Bankruptcy Context An important element of financial and estate planning is preserving the assets that people have worked hard to accumulate. In today s increasingly litigious society, everyone has heard stories about others losing wealth as a result of lawsuits, bankruptcy or nursing home costs. After a judgment is entered against a debtor, for example, as a result of an unpaid debt or a settlement in a lawsuit, the creditor has the right to collect the judgment from the assets and income of the debtor. Each state protects certain assets and a limited amount of income from the claims of creditors to enable the debtor to live and provide support for his or her dependents. In many states, life insurance, annuities and IRAs are given protected status because of their importance in providing protection for survivors and providing for the debtor s retirement. Other types of qualified retirement plans, such as 401(k) and pension and profit-sharing plans, are protected under federal law. This chart shows the status of life insurance, annuities and IRAs in each state. This is for information only and is not legal or tax advice. Individuals need to discuss the matter with their attorneys for information specific to their situation. Any attempt to defraud existing creditors will be set aside by the courts and additional liability could be imposed on both the debtor and the advisers. Certain types of debts, such as child support and tax obligations, cannot be avoided and can be satisfied out of otherwise exempt property. This chart does not address the situation where the debtor files for bankruptcy or when an individual applies for Medicaid. Exemptions are generally significantly more restrictive in these cases. State Statute Insurance Death Proceeds Insurance Cash Values Annuity Traditional IRAs Roth IRAs Alabama CA 6-10-8, 19-3-1, 27-14-29, 27-14-32 $250 per month if in pay status. Alaska AS 09.38.025, 09.38.030, 09.38.050, 09.38.115, 09.38.017. 8 AAC 95.030 Arizona ARS 20-1131, 33-1126 Arkansas ACA 23-79-131, 23-79-134, 16-66-220 16-66- 218(b)(16) If a wife is owner and beneficiary of a policy insuring her husband, the proceeds are exempt from the wife s and husband s provision for the husband. If the beneficiary is a spouse or dependent of the insured, the proceeds are considered earnings, income, cash, or other liquid assets subject to claims of beneficiary s creditors to the extent all of the beneficiary s earnings exceed $1,400. These amounts are indexed for inflation. No exemption for other beneficiaries. Up to $20,000 is exempt from beneficiary s creditors if the beneficiary is a surviving spouse or child. Beneficiaries are entitled to cash values as against the insured s This exemption does not apply to the insured. Loan values and accrued dividends not in excess of $10,000, indexed for inflation, are exempt from insured s Maximum of $25,000 is exempt from insured s creditors if policy has been in effect for more than two years and names family member or dependent as beneficiary. life insurance death proceeds and cash values. beneficiary s Assets held in an IRA are It is not clear whether distributions are considered earnings that are subject to garnishment. amounts contributed within 120 days before the debtor files for bankruptcy. IRA deposits up to $20,000 are exempt, if they were deposited over one year prior to filing for bankruptcy. Allstate Life Insurance Company Page 1
Statute Insurance Death Proceeds Insurance Cash Values Annuity Traditional IRA Roth IRA State California Cal. Civ. Proc. Code 704.100, 704.115, 704.100(b) Colorado CRS 13-54-102, 13-54-106, 10-7-106; 13-54- 102(I)(B) Connecticut CGSA 38a-453, 52-321a, 52-352b Delaware DCA Title 18, 2725, 2728, DCA Title 10, 4914, 2725 District of Columbia DCCA 15-503, 31-4716 Florida FSA 222.13, 222.14, 222.21 Georgia GCA 33-25-11, 33-26-5, 33-28- 7, 18-4-22, 44-13-100(a)(11)(C)] Hawaii HRS 431:10-232, 651-124 Idaho IC 11-604, 11-604A, 41-1833, 41-1836, 55-1011, 41-1833 Exempt from the insured s and beneficiary s creditors to the extent reasonably necessary for the support of the judgment debtor, spouse and dependents. creditors, but not the beneficiary s, if clause prohibits proceeds from being used to pay beneficiary s Limited exemption from insured s creditors of first $50,000 of cash values. No exemption for increase in cash value due to money contributed within two years of judgment. creditors, not to exceed $4,000. death proceeds. life insurance death proceeds. Assets held in the IRA and payments from the IRA are exempt, but only to the extent of 1) the amounts in the account are exempt for federal income tax; and 2) are reasonably necessary for the support of the debtor, the debtor s spouse, and dependents when the debtor retires. If payments are made periodically, they are subject to wage garnishment. Assets held in an IRA are IRA s. $200 per month if in pay status and have dependents, otherwise exempt up to $60 per month. The beneficiary s interest in death benefit exempt to extent reasonably necessary for support or debtor and dependent if insured was individual of whom debtor was a creditors if payable to spouse, child, parent or other Exempt. Insurer shall have the power to hold the proceeds of the policy under an agreement with the beneficiaries. and beneficiary s child, parent or other beneficiary s Proceeds of an annuity are exempt, so long as the beneficiary or assignee of the contract, is not the owner of the policy or the owner's estate. if payable to spouse, child, parent or other Assets held in the IRA and payments received from the IRA by the owner or beneficiary are exempt to the extent of contributions and earnings thereon that do not exceed 1) qualified rollovers or 2) the annual contribution limits. Assets held in an IRA are Assets held in an IRA are Payments from an IRA are exempt to the extent of 25% of the debtor s disposable earnings. contributions made within three years before the date a civil action is initiated against the debtor. Assets held in an IRA are Assets held in and payments received from the Roth by the owner or beneficiary are Allstate Life Insurance Company Page 2
Illinois 215 ILCS 5/238 735 ILCS 5/12-1001, 5/12-1006 child, parent or other beneficiary s creditors if payable to spouse, child, parent or other (2) Indiana IC 27-1-12-14, 34-55- 10-2, 34-6- 2-131 Exempt from the insured s creditors if payable to spouse, child, parent or other the beneficiary was a dependent of insured and only to the extent reasonably necessary for the support of beneficiary and his or her dependents. and insured s spouse s child, or other dependent relative, other than premium paid within 1 year of filing bankruptcy. Iowa ICA 627.6 creditors if payable to spouse, child or other Exempt from beneficiary s creditors existing prior to insured s death, to the extent of $15,000, if beneficiary is the surviving spouse, child or dependent of the insured. Kansas KSA 40-414, 60-2308, 60-2313 Kentucky KRS 301-14-300, 304-14-330, 427.150 Louisiana Maine Maryland LSA-R.S. 22:647, 13-3881 24-A MRSA 2428, 2431 14 MRSA 4422 ACM Ins. 16-111 ACM ET 8-115 ACM CJP 11-504 and beneficiary s creditors if payable to spouse, child or dependent relative. Exempt from beneficiary s death proceeds. Assets held in an IRA are exempt to the extent of contributions by or on behalf of debtor and earnings thereon that were not subject to income tax at the time of the contribution and which are not subject to income tax at the time of the judgment. child or other dependent, but limited to aggregate of $10,000 for policies acquired within 2 years of judgment. Exempt, except to the extent payments are attributable to contributions to the contract within a year of filing a bankruptcy petition and are above the normal and customary contributions. Annual contributions, and the earnings thereon, are exempt to the extent that the contributions do not exceed $2,000 annually. (2) death proceeds. Assets held in an IRA are death proceeds. creditors, but limited to $35,000 for policy issued within nine months of process seeking to reach cash or loan value. child or dependent relative. up to $35,000 for policy issued within nine months of process seeking to reach cash or loan value. Exempt from beneficiary s creditors existing at time proceeds are made $450 per month if in pay status. if payable to spouse, child or Exempt from beneficiary s amounts contributed within 120 days of declaring bankruptcy. Payments from an IRA are not Assets held in the IRA and payments from the IRA are exempt, except for contributions made within one year of filing for bankruptcy. exempt to the extent of the greater of $15,000 or to the extent reasonably necessary for the support of the debtor and any dependent of the debtor. Assets held in an IRA are exempt, but only to the extent of deductible contributions and earnings thereon. 2 IRA, but only to the extent of the maximum contributions allowed under 408A. Allstate Life Insurance Company Page 3
Massachusetts ALM Ch. 175, 125, 126, 132C, beneficiary is the wife of the insured. (2) Michigan Minnesota MCLA 500.2207, 600.6023 MSA 61A.12, 550.37.10 Mississippi MCA 85-3- 11, 85-3-13, 71-1-43, 85-3-1 Missouri VAMS 377.330, 513.430, 513.427 Montana MCA 25-13- 609, 31-2- 106, 33-15- 511, 33-15- 514 Nebraska RSN 44-371, 44-1089, 25-1558. Exempt up to $20,000, plus $5,000 per dependent, if the beneficiary is the spouse or dependent of the insured. If paid to insured s estate, only $50,000 of the proceeds are and beneficiary s beneficiary is related to the insured by blood or marriage. credit ors. Exempt up to $4000 if the insured is the debtor or someone upon whom the debtor is creditors, but limited to $50,000 of cash value or loan value if increase in policy value is due to premiums contributed within twelve months of judgment or bankruptcy. Exempt from owner s creditors if the insured is the owner or the insured is an individual upon whom the owner is a creditors up to $4,000 in value in any unmatured life insurance contract. creditors, but limited to an aggregate of $10,000 on all cash values of life insurance and accrued benefits under annuities, per individual insured who is also policy owner. Annuity contracts with clause that expressly grants the exemption. Group annuity contracts exempt (no provision for individual annuity contracts). Exempt from owner s Account value is exempt from owner s creditors, but limited to an aggregate of $10,000 on all cash values of life insurance and accrued benefits under annuities, per individual insured who is also policy owner. Payments to beneficiaries are exempt from owner s creditors and from beneficiary s creditors if the beneficiary is related to the insured by blood or marriage. contributions made during the 5 years period preceding the debtor s declaration of bankruptcy or entry of judgment in excess of 7% of the total income of the debtor for such period. Assets held in and the payments from an IRA are exempt to the extent of deductible contributions and earnings thereon, except for contributions made within 120 days of filing bankruptcy. Assets held in and the payments from an IRA are exempt to the extent of debtor s aggregate interest in all retirement plans, including IRAs and Roth IRAs, not to exceed a present value of $30,000 plus additional amounts reasonably necessary for the support of the debtor, spouse, and any Assets held in the IRA are Payments are exempt to the extent reasonably necessary for the support of the debtor and any exempt to the extent reasonably necessary for the support of the participant and any dependents. provision for non-bankruptcy situations. Assets held in an IRA are Payments from an IRA included as earnings subject to garnishment within the limits of RSN Sec. 25-1558. (2) provision for nonbankruptcy situations. Allstate Life Insurance Company Page 4
Nevada NRS 21.090, 687B.260, 687B.290 Assets held in an IRA are exempt, but not in excess of a present value of $500,000. New Hampshire New Jersey New Mexico New York North Carolina North Dakota NHRSA 408:2, 512:21, 515:13, 511:2 NJSA 17B:24-6, 17B:24-7, 25:2-1 NMSA 42-10-1, 42-10-2, 42-10-3, 42-10-5 CLNY Ins. Law 3212, 5205 GSNC 58-58-95, 58-58-115. N.C. Const. Are. X, 5, 1C-1601 NDCC 26.1-33-36, 26.1-33-40, 28-22- 03 and beneficiary s creditors the beneficiary is the owner of the policy and also the spouse of the insured. creditors, to the extent of an annual premium of $1,000. Pro rata exemption if premium exceeds $1,000. Court held that exemption applied to beneficiary only and that insured could not protect his interest in policy. The beneficiary is entitled to the cash value as against the insured s Not clear whether the insured can assert that exemption on behalf of the beneficiary. and beneficiary s creditors, up to $100,000 per IRA (with an aggregate of $200,000 for all IRAs, life insurance, annuities, pensions and retirement plans) if payable on death to spouse, children or dependents. The dollar limit does not apply to the extent reasonably necessary for the support of the debtor and dependents. Assets held in an IRA are $500 per month if in pay status. beneficiary s if the owner paid consideration for the annuity. Otherwise, exempt from owner s and beneficiary s creditors t o the extent of the reasonable requirements of the debtor and dependents. Assets held in an IRA are exempt, except for contributions made within 90 days of the interposition of a claim based on a money judgment. Assets held in an IRA are life insurance. exempt, up to $100,000 per IRA (with an aggregate of $200,000 for all IRAs, life insurance, annuities, pensions and retirement plans). The dollar limit does not apply to the extent reasonably necessary for the support of the debtor and dependents. Allstate Life Insurance Company Page 5
Ohio ORC 3911.10, 2329.66 creditors if payable to spouse, child, dependent, charity or creditor. if payable to spouse, child, dependent, charity or creditor. Oklahoma 31 OSA 1 36 OSA 3631.1 Oregon Pennsylvania ORS 23.170, 743.046, 743.049 42 Pa. CSA 8124 Rhode Island GLRI 27-4- 11 South Carolina South Dakota CLSC 15-41-30 CLSC 38-63-40 CLSC 38-63-40(B)] SDCL 43-45-6, 43-45- 16, 43-45- 17, 43-45- 18, 58-12-4, 58-12-6, 58-12-8 Tennessee TCA 56-7- 201, 56-7- 203, 26-2- 105 Texas Ins. Code 1108.051 & Property Code 42.0021 and beneficiary s creditors if payable to spouse, child or creditors if payable to spouse, children or dependents. Exempt from beneficiary s creditors if the beneficiary was a dependent of the insured and then only to the extent reasonable necessary for the support of the beneficiary and dependents. and beneficiary s creditors up to $20,000 if payable to spouse or child. creditors if payable to spouse, child or and beneficiary s child, dependent, charity or creditor. and beneficiary s child or and $20,000 if payable to spouse or child. child or and beneficiary s beneficiary s $500 per month if in pay status. Exempt if not assignable, but not including contributions made within one year of bankruptcy filing or amount in excess of $15,000 contributed in any 12 month period. The proceeds of an insurance annuity are $250 per month if in pay status. if payable to spouse, child or beneficiary s exempt to the extent of qualified rollovers and deductible annual contributions, and the earnings thereon. Assets held in an IRA are exempt to the extent of contributions, and the earnings thereon, that were not taxable to the participant at the time they were made. Assets held in an IRA are exempt, except for contributions made within one year of filing for bankruptcy. exempt, except that contributions in excess of the annual contribution limit (regardless of deductibility) are not exempt, to the extent reasonably necessary for the support of the debtor and dependents. Assets held in and payments from all the debtor s employee benefit plans, which include Traditional and Roth IRAs, up to a total of $250,000 in assets, are Assets held in an IRA are Assets held in an IRA are exempt to the extent of deductible contributions, and earnings thereon. Assets held in and payments from a Roth are exempt to the extent of qualified rollover and annual contributions, and the earnings thereon. Assets held in a Roth are Allstate Life Insurance Company Page 6
Utah UCA 78-23- 5, 78-23-6, 78-23-7 contributions within one year of filing for bankruptcy. Vermont 8 VSA 3706, 3709, 12 VSA 2740 and beneficiary s creditors if payable to spouse or dependent of the insured, to the extent reasonably necessary for the support of the debtor and dependents. If the beneficiary was a dependent of the insured, exempt from beneficiary s creditor to the extent reasonably necessary for the support of the beneficiary and any dependents. Exempt from all other beneficiary s creditors creditors up to $5,000 of accrued dividends and loan values. Beneficiaries are entit led to cash values as against the insured s This exemption does not apply to the insured. Exempt from beneficiary s creditors existing at time policy is made available to the beneficiary. Assets held in an IRA are exempt to the extent of deductible contributions made more than one year from the date of filing bankruptcy, and the earnings thereon. Debtor s interest in a Roth is exempt to the extent contributions made more than one year from the date of filing bankruptcy do not exceed annual contribution limits. Virginia VC 38.2-3122, 38.2-3123, 38.2-3122, 34-34 Washington West Virginia Wisconsin RCW 48.18.410, 48.18.430, 6.15.020 WVC 33-6- 27, 38-10-4 WSA 815.18 Wyoming WS 26-15- 129, 26-15- 132 and beneficiary s beneficiary was a dependent of the insured, to the extent reasonably necessary for the support of the beneficiary and dependents. creditors unless the right to change beneficiary is retained. Beneficiaries are entitled to cash values as against the insured s This exemption does not apply to the insured. Exempt from owner s creditors up to $4,000 of accrued dividends and loan values if the policy insures the life of the debtor or an individual upon whom the debtor is a Exempt from the insured s $250 per month if in pay status. Assets held in debtor s retirement plans, which include IRAs, are exempt to the extent all the plans provide an annual aggregate benefit not in excess of $17,500, as determined by an age-weighted table set forth in the statute. This exemption does not apply to contributions and the earnings thereon made within two years of the date the debtor claims the exemption. If debtor claims an exemption for a plan under 401, 403(a), 403(b), 409, or 457, he cannot claim an exemption for an Assets held in an IRA are exempt to the extent of deductible contributions, and the income thereon, made while solvent. Exempt to the extent they are subject to tax deferral or are not subject to income tax when withdrawn. Allstate Life Insurance Company Page 7
Footnotes and Assumptions It is not clear whether this exemption extends to payments from the (2) It is not clear whether the exemption for IRAs extends to Roth IRAs. The table assumes that no payment of premium or purchase of a life in surance policy or annuity contract, or contribution to an IRA, was made with the intent to defraud creditors; (2) life insurance and/or annuities are individually owned by the insured and all rights of ownership were retained by the insured; (3) the beneficiaries of life insurance and/or annuities are named individuals other than the insured or the insured s estate; (4) no interest in any policy or contract has been granted to a creditor; (5) the creditor does not have a claim for child or spousal support, or incident to a divorce; and (6) the creditor does not have a claim as a crime victim under any state program or statute. Exemptions in bankruptcy proceedings may be different from those shown. Unless other noted, the exemptions for annuities refer to t he monthly benefits that would be provided under a contract that has either been annuitized or is making payments to a beneficiary due to the owner s death. For annuities that have not been annuitized, exemptions include the account value of a contract to the extent that the monthly benefits would not exceed those noted if the contract were annuitized. This table was completed in January 2006, using sources available in electronic format. This is not specific legal or tax advice and customers should consult with legal advisors in the applicable state. Allstate, its distributors and their respective representatives do not provide tax, accounting or legal advice. Allstate Life Insurance Company Page 8