Creditor’s Rights Under Private Annuities and Grantor-retained Annuity Trusts in Florida
The second part of a recent two-part Florida Bar Journal article titled “Unraveling the Mysteries of the Florida Exemptions for Life Insurance and Annuity Contracts, Part Two” discusses the creditor protection elements of annuity contracts.1 The article discusses inter alia the exemption granted by F.S. §222.14. Under this statute, the proceeds of an annuity contract issued to a Florida resident are statutorily exempt from the beneficiary’s creditors.2
The article reaches the conclusion that a private annuity arrangement should not qualify for protection under the Florida statute as an exempt asset because the legislature did not intend to protect private contracts.3 The authors respectfully disagree with this perspective in light of the analysis and authority cited below, which includes general rules of statutory construction and the bankruptcy decision in In re Mart, 88 B.R. 436 (S.D. Fla. 1988), which specifically held that a private annuity contract entered into between a debtor and a trust established by the debtor was a protected annuity under F.S. §222.14.
The article refers to legislative history and concludes that the legislature intended only to provide protection for commercial annuities, because commercial annuities were apparently mentioned in the legislative history. If the legislature considered private annuities during its legislative sessions but did not address them in the statute, then the failure to omit them from the final version of the statute that was enacted would be a clear acknowledgment that they fall within the purview of the statute. A reference to commercial annuities in the legislative history, without more, is hardly sufficient to change the clear meaning of a statute.
On the other hand, if the legislature did not contemplate private annuities when passing this legislation, then one could posit that they would still be protected, because the statute provides protection for all annuities without limiting the types of annuities protected. Put another way, it would take a legislative clarification to modify the clear language of the statute, which is quite expansive in its literal scope, as it refers to annuity contracts “upon whatever form.”
This statutory construction argument is supported by established concepts of judicial construction. In the 1989 case of U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235 (U.S. 1989), the U.S. Supreme Court found that the interpretation of a statute should be based upon the wording thereof, unless the clear intent of the legislature is other than as set forth in the statute.4 If the language of a statute is plain, courts must enforce the statute according to its clear and unambiguous terms.5
Furthermore, the law is well-settled that creditor exemptions are to be construed liberally in favor of providing the benefits of the exemptions to debtors.6 In In re Mart, the court stated that “there is no basis in this statute to restrict the exemption to annuities provided by completely unrelated, public entities.”7 In LeCroy v. McCollam, 612 So. 2d 572 (Fla. 1993), the Florida Supreme Court noted that the statute does not limit the exemption to any particular type of annuity contract. “This holding suggests that even ‘private’ arrangements not involving ‘commercial’ annuities will qualify for the exemption.”8
To limit F.S. §222.14 so that it does not apply to private annuities is to create a distinction that does not exist in the statute, and would be tantamount to rewording the statute by changing the references to “annuity contracts” to “commercial annuity contracts” as shown below:
The cash surrender values of life insurance policies issued upon the lives of citizens or residents of the state and the proceeds of commercial annuity contracts issued to citizens or residents of the state, upon whatever form, shall not in any case be liable to attachment, garnishment or legal process in favor of any creditor of the person whose life is so insured or of any creditor of the person who is the beneficiary of such commercial annuity contract, unless the insurance policy or commercial annuity contract was effected for the benefit of such creditor. (Additional, hypothetical verbiage italicized.)
It is not appropriate to add words to a statute that were not placed there by the legislature (to do so would be an impermissible abrogation of legislative power). Such an interpretation of the statute not only would be strained, but also seems illogical in light of the last phrase, which clearly interposes a limitation on the exemption for proceeds of annuity contracts when they were “effected for the benefit of such creditor.”9 Certainly, the concept of a private annuity existed and the legislature could have expressly excluded such an annuity if it so chose (in the same way it excluded annuity contracts effected for the benefit of creditors).
The article refers to the verbiage of the statute that indicates “annuity contracts issued to citizens or residents” are protected and makes the case that, because commercial carriers “issue” annuity contracts, and because the definition of “issuer” under the Florida securities statutes refers to arm’s length parties issuing securities, the use of the word “issued” in the statute supports the position that the exemption for proceeds of annuity contracts should not include private annuity arrangements. The authors of this article believe that this reads more into the verb “issue” than should be the case, and would again suggest that the cardinal rule of statutory construction is to give words their plain meaning.10
In this vein, the common meaning of “issue” (i.e., its ordinary dictionary definition), when used as a verb is “to give or come out” or to “circulate or to distribute in an official capacity.” In common parlance, there is no restriction on what type of person the issuer can be. Accordingly, whether the annuity contract is issued by a commercial carrier or a private individual is less important than whether an annuity contract is properly issued in the first instance. Moreover, if one looks to the use of the word “issued” in other legal contexts, it is clear that a person or entity may properly issue something to himself or herself (notwithstanding the absence of an arm’s length relationship). Indeed, garden variety transactions routinely involve a non-arm’s length party issuing a certificate of ownership or an employment agreement to another person. There is no reason why a private party cannot issue a contract such as an annuity contract in the same form and fashion as an institutional carrier. In fact, the very securities statute referenced in the article, F.S. §517.021, contemplates that a person can be an issuer of its own securities.11 Frankly, the article disregards the fact that the Internal Revenue Code recognizes that a self-settled trust can, indeed, be a separate and distinct legal entity.12
The article then discusses self-settled trusts which enter into annuity contracts to the grantors thereof. The article concludes that an annuity contract payable to the grantor of an irrevocable trust should not protect the grantor or the trust assets from creditor claims despite the holding in In re Mart. The article discusses grantor-retained annuity trusts (GRATs) in this context.13
The article quotes F.S. §736.0505, which was enacted in July 2007, for the proposition that creditors can freely reach into a self-settled irrevocable trust where the grantor has contracted for the right to receive payments from the trust. F.S. §736.0505(1)(b) states that a creditor may reach assets held under a self-settled irrevocable Florida trust to the extent of “the maximum amount that can be distributed to or for the settlor’s benefit.” The scrivener’s summary to the statute indicates that the provision was intended to simply codify the Florida common law, which has allowed creditors of a self-settled irrevocable trust to reach payments to the extent that a trustee has the discretion to pay monies to the grantor.14
The article then cites the case of In re Brown, 303 F.3d 1261 (11th Cir. 2002), which is a 2002 11th Circuit Court of Appeals bankruptcy decision that held that the creditors of a self-settled charitable remainder unitrust, which paid seven percent of the value of trust assets to the grantor each year for life (with the remainder passing to charity), could attach the unitrust payments as they came due each year, but could not attach the remainder interest.
The court in Brown found that the petitioners had not timely asserted that the unitrust payments could be protected as proceeds of an annuity contract under F.S. §222.14.15 The court held that the creditors could not reach the trust corpus, but could attach the income stream. The court held that the remainder interest, as well as future payments not yet due, were protected from the creditors under Florida law. Based on the authors’ review, this result is consistent with the common law in most other states.
The Brown decision cites a number of consistent cases which state that an income interest reserved to a settlor entitles the creditor to receive the income from the trust, on an annual basis, but not the remainder interest.
The authors are unaware of any well-publicized, reported decision in the United States which indicates that a creditor can reach assets held in a self-settled irrevocable trust, except to the extent actually payable to the grantor at the time of levy.16
Even trusts established by grantors who retain the right to income and additionally retain the power to appoint how trust assets would be devised could not have trust principal seized by creditors where the power of appointment was limited to not being exercisable in favor of the grantor/powerholder or his or her estate, creditors, or creditors of the estate.17
When a grantor establishes an irrevocable trust and enters into a private annuity contract with the trust, there is an arm’s length arrangement between the grantor and the trustee of the trust, and the annuity payments made to the grantor should not be regarded as “benefits” payable to the grantor as a beneficiary of the trust. Similarly, with a GRAT, the Internal Revenue Code requires that the payments made back to the grantor be set at the time of establishing the trust based upon appropriate actuarial calculations or a fixed dollar amount, which, by definition, cannot exceed the value of assets placed in the trust at the time that the GRAT is established.
Based upon the above, the authors believe that a self-settled trust that enters into a private annuity contract or is a GRAT theoretically should have its assets exempt from claims of creditors of the grantor, and that the annuity payment rights held by the grantor should, as a normative matter, be exempt from creditor claims under F.S. §222.14. Obviously, an exception to the above would apply if the funding of the trust were considered a fraudulent transfer under F.S. §222.30 or §§726.105-726.106. Also, it is entirely possible that a court could disagree with this interpretation, in what would be a case of first impression, or that the legislature could rewrite the statute to restrict the scope of the statutory exemption.18
If the above-referenced article is correct and a court were to find that the proceeds of an annuity contract were not exempt from creditor claims, then the most a creditor could attach or garnish would be the annuity payments then due to the extent that the trustee has not applied the annuity payment “for the benefit of” the grantor as permitted under Treasury Regulation §25.2702-3(b)(i).
The bottom line is that private annuity contracts and GRATs are legitimate estate planning tools (particularly in a low-interest rate environment)19 that might also have secondary asset protection benefits if a court were to construe Florida law in accordance with the plain meaning of the statute as written.
1 Jonathan E. Gopman, Matthew N. Turko, & Howard M. Hujsa, Unraveling the Mysteries of the Florida Exemptions for Life Insurance and Annuity Contracts, Part 1, 82 Fla. B. J. 52 (Dec. 2008); Part 2, 83 Fla. B. J. 55 (Jan. 2009).
2 Fla. Stat. §222.14 states in relevant part: “the proceeds of annuity contracts issued to citizens or residents of the state, upon whatever form, shall not in any case be liable to attachment, garnishment or legal process in favor of any creditor of the person…who is the beneficiary of such annuity contract, unless the…annuity contract was effected for the benefit of such creditor.”
3 We have purposely italicized the word “should” given that the authors did not necessarily conclude that such arrangements “did” not qualify, but rather suggest that they “should” not qualify for the statutory exemption.
4 U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235 (U.S. 1989); see also U.S. v. Northrop Corp., 811 F. Supp. 333 (S.D. Ohio 1992).
5 In re Griffith, 206 F.3d 1389, 1393 (11th Cir. 2000) (citing, U.S. v. Ron Pair Enter., 489 U.S. 235, 241 (1989)).
6 Havoco of Am., Ltd v. Hill, 790 So. 2d 1018, 1021 (Fla. 2001) (quoting, Milton V. Milton, 58 So. 718, 719 (1912)). See also In re Solomon., 95 F. 3d 1076 (1996) (special Florida exemption for proceeds of debtor’s annuity contracts is to be broadly construed to reach all annuity contracts).
7 In re Mart, 88 B.R. 436, 438 (S.D. Fla. 1988).
8 RIA, Asset Protection and Tax Aspects of Annuities §13.06.
9 As the authors of the article point out, Fla. Stat. §222.30 (the fraudulent asset conversion statute) also limits the applicability of the exemption under §222.14.
10 Southwest Florida Water Management District v. Save the Manatee Club, Inc., 773 So. 2d 594 (Fla. 1st D.C.A. 2000).
11 Umbel v. Foodtrader.com, Inc., 820 So. 2d 372, 374 (Fla. 3d D.C.A. 2002).
12 The article specifically states that “in the context of self-settled trusts, there is no act whereby one party issues anything of value to another party.”
13 GRATs are a popular estate tax planning tool whereby a grantor contributes assets to a trust in exchange for the right to a stream of payments defined by the Internal Revenue Code as a “qualified interest.” The term “qualified interest” in Code §2702(b)(1) means any interest, which consists of the right to receive fixed amounts payable not less frequently then annually.
14 Florida Trust Code Scrivener’s Summary 28-29.
15 In re Brown, 303 F.3d 1261at fn. 4.
16 See also Robert T. Danforth, Rethinking the Law of Creditors’ Rights in Trusts, 53 Hastings L. J. 287 (2002).
17 See US v. Baldwin, 283 Md. 586 (MD 1978).
18 A court decision would likely be retroactive, i.e., it would unwind the challenged transaction — whereas legislation is typically prospective.
19 Certain techniques, like grantor-retained annuity trusts (GRATs), charitable lead annuity trusts (CLATs), and private annuities do better in low interest rate environments, whereas others, most notably, qualified personal residence trusts (QPRTS) and charitable remainder annuity trusts (CRATS) fare worse.
Alan S. Gassman is the senior partner at Gassman, Bates & Associates, P.A. He received his J.D. and his LL.M. in taxation from the University of Florida. He thanks an associate, Martha Sosa, for her extensive work on this article.
David L. Koche is a partner at Barnett, Bolt, Kirkwood, Long & McBride. He received his J.D. from Georgetown University and his LL.M. in taxation from the University of Florida.
Michael C. Markham is a partner at Johnson, Pope, Bokor, Ruppel & Burns, LLP. He received his J.D. from Florida State University.
This column is submitted on behalf of the Tax Section, Frances D. McCoid Sheehy, chair, and Michael D. Miller and Benjamin Jablow, editors.