The Florida Bar

Florida Bar Journal

Unraveling the Mysteries of the Florida Exemptions for Life Insurance and Annuity Contracts, Part 1

Real Property, Probate and Trust Law

Florida is one of the most generous states in providing mechanisms for its residents to protect wealth.1 For instance, Florida law provides an unlimited exemption for equity in a primary residence, the value of life insurance and annuities, and for certain retirement plan accounts and education savings accounts.2 Although each of these exemptions is generous, to claim an exemption, a resident must carefully structure the ownership of a potentially exempt asset within the parameters of the rules of the exemption. This is a two-part article that examines the application of the exemptions for life insurance and annuities that are set forth in §§222.13 and 222.14 of the Florida Statutes.3 Part one of this article examines the application of the exemption for the proceeds received under a life insurance policy as a result of the insured’s death. Part one also examines structural issues regarding the ownership of a life insurance policy and the application of §222.14 as well as the ability of a debtor to access the cash surrender value of a life insurance policy without forfeiting the benefit of the exemption. Finally, part one examines the meaning of the term “annuity contract,” reviewing the applicable case law and the legislative history of §222.14.

Statutory Exemption for Proceeds of Life Insurance : Section 222.13 has little mystery to its interpretation.4 If a Florida resident dies “leaving” insurance on his or her life, the proceeds of any such policy will inure to the benefit of the person who is designated as the beneficiary of such policy, and such proceeds will be exempt from the claims of the insured’s creditors unless the policy or a valid assignment of the policy provides it is for the benefit of a creditor.5

Nevertheless, if the insurance proceeds become payable to the insured or his or her estate (or executors, administrators, or assigns), the proceeds will constitute a part of the insured’s estate for all purposes and will be administered by the personal representative of the insured’s estate according to the Florida Probate Code.6 It does not matter whether the insured’s estate is specifically designated as the beneficiary of the insurance, or if the proceeds become payable to the insured’s estate through another source.7 Thus, to avoid the possibility of a creditor of a decedent reaching the proceeds of an insurance policy on the decedent’s life that was not specifically procured for the benefit of a creditor, care must be taken to ensure that none of the proceeds of an insurance policy becomes subject to administration in the decedent’s estate.

It should also be emphasized that this exemption does not protect insurance proceeds from a beneficiary’s creditors. Protecting insurance proceeds from an intended beneficiary’s creditors requires additional planning. For example, the insurance proceeds could be made payable to an irrevocable trust for the benefit of the beneficiary. If the trust is drafted properly, it can maximize the protection of the insurance proceeds from the claims of a beneficiary’s creditors.

Statutory Exemption for Cash Surrender Value of Life Insurance and Proceeds of Annuity Contract : Although there is little mystery to the interpretation of §222.13, the same cannot be said of §222.14.8 According to §222.14, the cash surrender value of an insurance policy issued on the life of a citizen or resident of Florida, and the proceeds of an annuity contract issued to a citizen or resident of Florida (in whatever form), cannot be attached, garnished, or become subject to legal process in favor of any creditor of the insured or of any creditor of the person who is the beneficiary of such annuity contract, unless the policy or annuity was effected for the benefit of such creditor.9

Exemption for Cash Surrender Value of an Insurance Policy Only Applies to an Insured’s Creditors : Section 222.14 protects the cash surrender value of an insurance policy from a creditor of the insured, but not from the creditor of any other party who may possess an ownership interest in the insurance contract.10 Additionally, the exemption does not protect collateral rights in an insurance policy, such as a repayment right under a split dollar plan or other premium financing arrangement, even though such a right may be owned by the insured.

Exemption Protects Cash Value of Life Insurance — Does it Apply to Withdrawals or Proceeds of Policy Loan? The exemption protects the cash surrender value of a life insurance policy.11 The statute is ambiguous in regards to whether the exemption protects withdrawals from the policy or amounts received pursuant to a policy loan. Unlike the exemption for the proceeds of an annuity contract, read literally, the exemption for the cash value of an insurance policy seems to preclude a debtor from accessing the surrender value of the policy without risking a loss of the exemption. Nevertheless, there is authority interpreting the statute to the contrary. In two related cases, an appellate court evaluated the actions of a debtor, John Faro (the debtor).12 In the first case in 1994, Porchester Holdings, Inc., obtained a judgment against the debtor in the amount of $192,000.13 Porchester then assigned the judgment to Technical Chemicals and Products, Inc. (the creditor). The debtor owned four insurance policies issued by Mass Mutual. On November 3, 1998, Mass Mutual issued a check in the amount of $100,000 to the debtor as a loan on one of the debtor’s policies. On April 15, 1999, the creditor filed a motion for a writ of garnishment on Mass Mutual. When the writ was filed, the debtor had not cashed the check. On May 6, 1999, Mass Mutual requested a stop payment on the check and decided that it would not issue another check until the court determined whether the cash surrender value of the limited whole life policy was subject to garnishment. The court affirmed the order of the trial court dissolving the writ of garnishment under §222.14 because the debtor never received the cash surrender value of the limited whole life policy. In a subsequent case involving the same judgment, the creditor attempted to garnish the cash surrender value of two other policies issued by Mass Mutual where the debtor had successfully withdrew $30,000 from the policies in 1997.14 The debtor used the funds to purchase a certificate of deposit from a bank. Simultaneously, the debtor secured a loan from the bank by executing a promissory note and assigning to the bank a security interest in the certificate of deposit as collateral for the loan. In 1998, the creditor served a writ of garnishment on the bank seeking to attach the certificate of deposit to satisfy its judgment against the debtor. The debtor moved to dissolve the writ, arguing that the certificate of deposit was funded with the cash surrender value of his life insurance policies. The court held that the certificate of deposit was protected under §222.14 because it was purchased with the cash surrender value of the debtor’s life insurance policies. Citing Goldenberg v. Sawczak, 791 So. 2d 1078 (Fla. 2001), the court noted that the words in §222.14 “upon whatever form” mean that the form of payment “is not relevant for purposes of having the exemption apply.”

Despite this precedent, significant practical problems may make it difficult to protect withdrawals made by an insured or policy loans obtained by an insured. The ambiguity in the statute may prove problematic and frustrating for a debtor who needs to access such funds. As the foregoing cases demonstrate, it was not easy for the debtor to retain the benefit of the exemption. As a result, it may be prudent for the insured to transfer his or her insurance policies to a nondebtor spouse or child, or possibly to a self-settled asset protection trust established in an appropriate jurisdiction.15 In either case, the exemption should continue to apply because the statute does not require the insured to own the insurance policy directly.16 There may be less risk that any part of the cash surrender value will be attached if a nondebtor spouse or child or a trustee of an asset protection trust withdraws funds from an insurance policy that are needed for a discretionary distribution or application for the benefit of the insured than for the insured to withdraw funds from an insurance policy personally. An insured who is a Florida resident should be able to transfer the policy at any time without the risk that the transfer could constitute a fraudulent transfer under Florida law.17

Private Placement Life Insurance — Layering Asset Protection Strategies for a Florida Resident : Private placement life insurance (PPLI) is an attractive asset protection and tax-efficient investment planning vehicle for Florida residents under the exemption set forth in §222.14. PPLI is a variable life insurance product that permits more flexibility in the choice of investments and asset managers for the wealth accruing inside the policy. The higher quality PPLI policies are usually issued by life insurance companies conducting business in certain foreign jurisdictions.18 To acquire PPLI, an insured will often settle one or more trusts in an appropriate foreign jurisdiction.19 If designed properly, the trust structure can offer significant asset protection and estate planning benefits. The protection afforded by the trust structure and the life insurance exemption under §222.14 provides a double layer of protection for a Florida resident.20

Exemption for Proceeds of Annuity Contract Applies to Owner and Other Beneficiaries : The protection afforded the proceeds of an annuity contract under §222.14 appears to be broader than the exemption provided for the cash surrender value of an insurance contract because it appears to protect both the party who originally procured the annuity contract and a successor beneficiary under the contract. The annuity exemption is broader than the life insurance exemption because the life insurance exemption does not protect the cash value of an insurance contract from an owner’s creditors when the owner is not also the insured.21

Exemption for Proceeds of Annuity Contracts — What is an Annuity Contract? Section 222.14 neglects to provide an adequate definition of an “annuity contract” or the “proceeds” of an annuity contract. The Florida Supreme Court provided an extensive analysis of the meaning of the term “annuity contract” in In re McCollam, 612 So. 2d 572 (Fla. 1993). In McCollam, McCollam (the debtor) was the beneficiary of an estate that had settled a wrongful death action against National Car Rental System, Travelers Insurance Company (Travelers) and another defendant in 1985. As part of the settlement of the wrongful death action, Travelers agreed to make payments to the debtor, with a portion payable annually and other portions in a lump sum. To pay its settlement obligation, Travelers, with the debtor’s consent, purchased an annuity for the debtor and named her the beneficiary of the contract. Nonetheless, Travelers remained primarily responsible for all payments required under the settlement agreement. In an unrelated case, the debtor was subsequently involved in a car accident with a man named LeCroy (the creditor) in 1987. The debtor declared bankruptcy and claimed an exemption for the annuity contract under §222.14.

Both the bankruptcy court and the federal district court concluded that the agreement was an annuity under §222.14. On appeal, the 11th Circuit Court of Appeals certified the following question to the Florida Supreme Court: “Whether, as a matter of law, an annuity contract which is established in lieu of a creditor paying a debtor a lump sum presently owed is exempt from creditor claims in bankruptcy under Fla. Stat. §222.14.”22

In a four to three decision, the Florida Supreme Court held that the debtor’s annuity contract was protected by §222.14. After noting that §222.14 did not contain a definition of “annuity” contract, the court reviewed a number of statutes in an attempt to determine the meaning of the term. The majority opinion noted:

The term is included, without definition in a number of statutes. See, e.g., §§61.076 (dissolution of marriage); 175.071, 175.201 (firefighters pension trust funds); 240.344 (community college retirement annuities); 627.464-.471, 627.601 (insurance). However, section 238.01(15), Florida Statutes (1989), defines annuity for the purposes of the retirement system for school teachers as: “annual payments for life derived as provided in this chapter from the accumulated contributions of a member. All annuities shall be paid in equal monthly installments.”

The majority opinion also noted:

[O]ther courts have defined an annuity as “‘a yearly payment of a certain sum of money granted to another in fee for life or for years. . . . In its broader sense it designates a fixed sum. . . payable periodically, at aliquot parts of a year, at stated intervals, and not necessarily annually.’” In re Gefen, 35 B.R. 368, 371 (Bankr. S.D. Fla. 1984) (quoting In re Talbert, 15 B.R. 536, 537 (Bankr. W.D. La. 1981)).. . . Black’s Law Dictionary …defines an annuity as “[a] right to receive fixed, periodic payments, either for life or for a term of years.”

Based upon the foregoing definitions, the Florida Supreme Court concluded that the contract purchased for her by Traveler’s was an “annuity contract” within the meaning of §222.14.23

Legislative History Ignored: The dissent in McCollam argued that the term “annuity contract” was ambiguous and that the majority should have reviewed the legislative history of §222.14.24 According to legislative history, the Florida Legislature amended §222.14 in 1978 to exempt the proceeds of annuity contracts because of a change made to the Florida Insurance Code the previous year. In 1977, the definition of life insurance in the Florida Insurance Code was expanded to include annuity contracts. Thus, according to the legislative history under §222.14, a change to the statute was necessary to clarify that the proceeds of annuity contracts were also exempt. It is clear that the Florida Legislature intended the annuity exemption to apply only to commercial annuities that are governed by the Florida Insurance Code because the legislative history of §222.14 specifically refers to the Florida Insurance Code and its definition of life insurance.

Despite its analysis that §222.14 applies to a contract that is described in the Florida Insurance Code, the dissenting opinion improperly concluded that the annuity contract was a glorified account receivable that was not protected by the exemption and unjustly deprived the creditor of property he was otherwise entitled to garnish.

The dissent in McCollam presented the more cogent analysis of the law. The Florida Insurance Code defines “life insurance” as insurance of human lives, including the granting of annuity contracts, whether fixed or variable annuity contracts.25 A “life insurer” or “life insurance company” is an “insurer” engaged in the business of issuing life insurance contracts.26 The term “insurer” is defined to include every person engaged as indemnitor, surety, or contractor in the business of entering into contracts of insurance or of annuity.27 The Florida Insurance Code requires that for any person to act as an insurer or any insurer to directly or indirectly transact insurance in Florida, the insurer must have a certificate of authority issued to the insurer by the Florida Office of Insurance Regulation of the Financial Services Commission.28

In final analysis, McCollam is a strange result. The majority opinion reached the proper conclusion with a faulty analysis and the dissenting opinion reached the wrong conclusion despite correctly analyzing the statute. The majority opinion was correct because, as recognized by the creditor, the debtor could have received a lump sum payment and then purchased an annuity with that money. The annuity would have been protected under §222.14. The result should not change merely because the debtor chose to settle her case by agreeing to have a commercial annuity contract directly purchased for her benefit. The analysis of Florida law in the majority opinion regarding the definition of the term “annuity contract” is, however, troublesome. As noted in the dissent, the court should have examined the meaning of the term “annuity contract” and the other relevant definitions provided under the Florida Insurance Code.

McCollam was not the first case to provide an expansive definition of the meaning of “annuity contract.” In In re Mart, 88 B.R. 436 (Bkrtcy. S.D. Fla. 1988), a bankruptcy court held that §222.14 applied to a private annuity.29 In Mart, the debtor (the debtor) established and funded an irrevocable trust (the trust) with $2,000 on November 6, 1986. The debtor’s daughter was designated as trustee of the trust. The trust was irrevocable, contained a spendthrift provision and was for the sole benefit of the debtor’s seven children, nieces, and nephews. The trust was designed to terminate upon the death of the survivor of the debtor and the debtor’s wife.

On November 7, 1986 (that is, one day after the creation and initial funding of the trust), the debtor and his wife entered into an annuity agreement with their daughter, as trustee of the trust. The debtor conveyed to the trust a parcel of real estate located in Ohio and a $500,000 promissory note payable to the debtor and his wife by Riverside Shoppes, Ltd. (collectively referred to as the property). In exchange for the property, the trustee of the trust agreed to pay stipulated sums at stated intervals to the debtor and his wife or the survivor of them. The value of the property was initially estimated at $850,000. The annuity agreement was modified 11 months later to reduce the estimated value of the property to $350,000 and to reduce the stipulated payments to $3,000 a month. Both the trust and annuity agreement were suggested and drafted by the debtor’s estate planning attorney.

The debtor filed bankruptcy. During the bankruptcy proceeding, the debtor claimed an exemption for the value of the annuity contract that the debtor had entered into with the Trust. Seven of the debtor’s creditors and the bankruptcy trustee (collectively, the objectors) challenged the claimed exemption. The bankruptcy court held for the debtor.

In its opinion, the bankruptcy court stated that there is no basis in the statute to limit the exemption to annuities provided by “completely unrelated, public entities” and that the statute must be construed liberally in the debtor’s favor.30

The objectors argued that the exemption should not apply because the income stream lacks the level of certainty that is traditionally associated with annuity payments and that the debtor exercised absolute control over the income stream. Furthermore, the objectors made the policy argument that if the debtor’s income stream is an annuity, any debtor can protect his or her assets by transferring his or her property to a related party in exchange for an income stream and label the transaction as an annuity. The court acknowledged that interpreting the annuity exemption in this manner, similar to many statutory exemptions, invites potential abuse. However, it rejected the objectors’ contentions. The court noted that the debtor did not intend to defraud his creditors because the trust and the annuity agreement were established for estate planning purposes and to minimize potential estate taxes 13 months before the bankruptcy.31

Series of Periodic Payments Are Not Protected Annuities: A series of periodic payments in and of itself is not sufficient to be classified as an annuity for purposes of §222.14. For instance, in In re Pizzi, 153 B.R. 357 (Bankr. S.D. Fla. 1993), Pizzi (the debtor) won the Connecticut State Lottery in 1985. Connecticut agreed to make 20 annual payments of approximately $160,000 to the debtor. To fund its obligation to the debtor, the state of Connecticut, purchased a commercial annuity contract from Metropolitan Life; the state of Connecticut, not the debtor, was listed as the owner and beneficiary of the annuity contract. Connecticut would simply remit the payments it received from Met Life to the debtor. The debtor went into bankruptcy and attempted to claim that her lottery winnings were exempt under §222.14 as payments under an annuity contract. The bankruptcy court disagreed, noting that the annuity contract was issued to the state of Connecticut and not to the debtor. Furthermore, the named beneficiary on the annuity contract was the state of Connecticut and not the debtor. According to the court, “Whether or not the [debtor] is alive, the state of Connecticut receives the yearly payments.”32

What is an Annuity Contract? The Uncertainty Continues: McCollam dealt with a commercial annuity contract, that is, an arrangement clearly protected under §222.14. Examined from this perspective, the disagreement between the majority and dissenting judges in McCollam could be viewed as a determination by the court regarding whether the contract was a commercial annuity or an account receivable because of the circumstances for which it was acquired. According to the majority, if an arrangement is determined to be an annuity contract, there is no need for further inquiry. The asset is exempt from attachment.

If McCollam is interpreted by future courts in this manner, Mart will probably be found to be inconsistent with it because Mart extended the application of §222.14 to private annuities. In providing an expansive definition for the term “annuity contract,” McCollam injected uncertainty into the application and scope of §222.14. The legislative history under §222.14 is clear that the definition of the term “annuity” under the statute as revised in 1978 was never intended to include a private annuity. Arguably, the reasoning of the majority opinion in McCollam was incorrect; however, it did reach the correct decision, that is, the commercial annuity in question was exempt under §222.14. Mart is the only reported case to conclude that §222.14 applies to a private annuity; nevertheless, the bankruptcy court’s holding rests on dubious ground because of the legislative history of the statute. Additionally, Mart should be viewed merely as a decision of one bankruptcy court providing rather limited or weak authority.

It would seem imprudent to rely upon Mart when advising a client on the application of the annuity exemption. It is quite possible that another court will rule that the exemption does not apply to a private annuity transaction because of the intention expressed in the legislative history. Such a ruling would be entirely consistent with McCollam. Also important in advising clients regarding the application of the annuity exemption, private annuity transactions are typically designed, if not controlled, by the debtor and the debtor’s family. Following McCollam, the exemption has been interpreted by the courts by examining the intention of the parties, that is, did the parties intend to enter into a contract that provides an annuity. Without the presence of a third party such as an insurance company, a court may be concerned that a private arrangement, though cast in the form of an annuity contract is, in substance, an easily manipulated tool the primary purpose of which is to thwart the legitimate claims of a creditor.

1 Asset protection and exemption planning is such a fundamental part of Florida law that an individual resident of Florida is granted a constitutional right to protect property under Fla. Const. art. I, §2. This provision provides in relevant part: “All natural persons…are equal before the law and have inalienable rights, among which are the right to enjoy and defend life and liberty, to pursue happiness, to be rewarded for industry, and to acquire, possess and protect property.”(Emphasis added.)

2 See Fla. Const. art. X, §4 (unlimited homestead exemption); Fla. Stat. §222.14 (unlimited exemption for cash surrender value of insurance contracts and for proceeds of annuity contracts); Fla. Stat. §222.21 (unlimited exemption for assets held in certain retirement plans); and Fla. Stat. §222.22 (unlimited exemption for assets held in certain educational savings accounts). Although Florida law provides unlimited protection for these assets, some or all of the benefit of these exemptions may not be available to certain debtors in a bankruptcy proceeding. See, e.g., Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Additionally, except for the homestead exemption, the availability of some of these exemptions could be vitiated by the application of Florida’s fraudulent conversion statute. See Fla. Stat. §222.30.

3 All section references are to the Florida Statutes unless otherwise indicated.

4 Fla. Stat. §222.13 provides in relevant part: “Whenever any person residing in the state shall die leaving insurance on his or her life, the said insurance shall inure exclusively to the benefit of the person for whose use and benefit such insurance is designated in the policy, and the proceeds thereof shall be exempt from the claims of creditors of the insured unless the insurance policy or a valid assignment thereof provides otherwise. Notwithstanding the foregoing, whenever the insurance, by designation or otherwise, is payable to the insured or to the insured’s estate or to his or her executors, administrators, or assigns, the insurance proceeds shall become a part of the insured’s estate for all purposes and shall be administered by the personal representative of the estate of the insured in accordance with the probate laws of the state in like manner as other assets of the insured’s estate.”

5 Fla. Stat. §222.13.

6 Id.

7 Id.

8 Fla. Stat §222.14 provides: “The cash surrender values of life insurance policies issued upon the lives of citizens or residents of the state and 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 whose life is so insured or of any creditor of the person who is the beneficiary of such annuity contract, unless the insurance policy or annuity contract was effected for the benefit of such creditor.”

9 Fla. Stat. §222.14.

10 See In re Allen, 203 B.R. 786 (Bankr. M.D. Fla. 1996); In re Lowery, 272 B.R. 317 (Bankr. M.D. Fla. 2001).

11 Bank of Greenwood v. Rawls, 158 So. 173 (Fla. 1934) (holding the cash surrender value of a life insurance policy includes any cash value that may be obtained either by means of negotiation or pursuant to an agreement for surrendering the policy in consideration of a sum of money to be paid in whole or in part conditioned upon a surrender of the life insurance feature of the policy, and is not limited to such a cash surrender value as can be demanded and legally enforced against an unwilling insurance company according to the usual significance of the term cash surrender value).

12 Technical Chemicals and Products, Inc. v. Porchester Holdings, Inc., 785 So. 2d 636 (Fla. 4th D.C.A. 2001); Faro v. Porchester Holdings, Inc., 792 So. 2d 1262 (Fla. 4th D.C.A. 2001).

13 Technical Chemicals and Products, Inc. v. Porchester Holdings, Inc., 785 So. 2d 636 (Fla. 4th D.C.A. 2001).

14 Faro v. Porchester Holdings, Inc., 792 So. 2d 1262 (Fla. 4th D.C.A. 2001).

15 Common jurisdictions permitting self-settled asset protection trusts now include Alaska (Alaska Laws, SLA 1997, Ch. 6 (H.B. 101), A.S. §§13.12.205(2), 13.27.050(a), 13.36.035, 13.36.310, 13.36.390, 34.40.010, 34.40.110(a), 34.40.110); Delaware (12 Del. Code Ann. §§3570-3576 (1997)); Missouri (M.R.S. §§428.005-428.059, 456.020, and 456.080); Nevada (N.R.S. §166.040); Rhode Island (Title 18, Chapter 9.2 of the General Laws of Rhode Island (The Qualified Dispositions in Trust Act)); South Dakota (SDCL §55-16-1, et seq.); Tennessee (TCA §35-15-505(1)); Utah (Utah Code §25-6-14(1)(a)); Wyoming (W.S. 4-1-510); Belize (Trusts Act); the Commonwealth of the Bahamas; the Cook Islands (International Trusts Act 1984); and Nevis (Nevis International Exempt Trust Ordinance, 1994). Of course, care must be taken to avoid gift tax on the transfer of an insurance policy.

16 See Fla. Stat. §222.14, providing in relevant part, “The cash surrender values of life insurance policies issued upon the lives of 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.” (Emphasis supplied.)

17 Florida law provides that property that is generally exempt under nonbankruptcy law, such as a life insurance policy owned by the insured, is not an asset that is subject to the fraudulent transfer rules. See Fla. Stat. §726.102(2)(b); Bank of Greenwood v. Rawls, 158 So. 173 (Fla. 1934).

18 For instance, Bermuda and the Commonwealth of the Bahamas have each developed a substantial legal and commercial infrastructure for PPLI products.

19 For example, Nevis, the Commonwealth of the Bahamas, or Bermuda.

20 Although not a concern in a properly structured asset protection trust arrangement, use of the PPLI (or other life insurance) wrapper can effectively eliminate the concerns illustrated in certain asset protection trust cases. See, e.g., In re Lawrence, 279 F.3d 1294 (11th Cir. 2002); and Federal Trade Commission v. Affordable Media, 179 F.2d 1228 (9th Cir. 1999).

21 In re: Allen, 203 B.R. 786 (Bankr. M.D. Fla. 1996). Query whether there is a valid policy reason not to extend the benefit of such exemption to at least closely related family members and certain other dependents. Such individuals, including a spouse of the insured, may own an insurance policy for a variety of planning reasons.

22 The 11th Circuit observed that a literal interpretation of §222.14 would allow the debtor to conceal an asset (the claim against the Travelers) from the creditor.

23 The court rejected the creditor’s argument that it should examine the underlying obligation that led to the purchase of the annuity contract. The creditor contended that the debtor’s annuity was merely security for Traveler’s obligation to make the required payments to the debtor and the annuity contract did not terminate Travelers’ responsibility to make the payments.

24 If the majority had properly found the term “annuity contract” to be ambiguous and reviewed the legislative history, it is highly probable that the majority would have likely come to the same conclusion.

25 Fla. Stat. §624.602(1).

26 Fla. Stat. §624.602(2).

27 Fla. Stat. §624.03.

28 Fla. Stat. §624.401.

29 See In re Mart, 88 B.R. 436 (Bankr. S.D. Fla. 1988).

30 Note, however, as discussed above, the statute per se provides a strong basis to limit the exemption to a commercial annuity.

31 One is left to wonder whether this transaction would pass scrutiny under Treas. Regs. §25.7520-3(b)(2). It should be noted that when Mart was decided, pursuant to §548 of the Bankruptcy Code, a fraudulent transfer could be avoided if it was made within the year preceding bankruptcy. This statute, however, did not apply in this case because the annuity was established 13 months prior to bankruptcy. Additionally, pursuant to §544(b) of the Bankruptcy Code, a fraudulent transfer could be avoided by creditors to the extent such transfer could be avoided under state law. At the time of this bankruptcy case, Fla. Stat §726.01, Florida’s fraudulent transfers statute, required proof of actual fraudulent intent to avoid a transfer and contained no specific time limitation. In reaching its conclusion that no fraudulent transfer occurred, the court relied on a number of facts. The debtor’s independent certified public accountant verified that when the annuity transaction was effectuated the debtor was solvent and had no lawsuits pending, the debtor owned other property having a value totaling $4 million more than his liabilities, the annuity involved was less than 10 percent of the debtor’s net assets and there was no motive to convert or conceal any other assets. The court refused to set aside the transfer under Fla. Stat. §726.01 because the facts did not support a finding of fraudulent intent.

32See also In re Connor, 172 B.R. 119 (Bankr. M.D. Fla 1993); and In re Solomon, 95 F.3d 1076 (11th Cir. 1996) for two additional cases addressing the issue of whether a series of periodic payments will qualify as an annuity contract.

Jonathan E. Gopman is a principal in the law office of Cummings & Lockwood, LLC, where he leads the wealth protection practice group. He has authored numerous articles and is a frequent lecturer on the topics of asset protection and estate planning. He received his juris doctorate from The Florida State University College of Law (with high honors) and an LL.M. in estate planning from the University of Miami School of Law.

Howard M. Hujsa is a principal in the private clients group of Cummings & Lockwood, LLC, in Bonita Springs. His practice involves estate and gift tax planning, tax-exempt organizations, and the administration of estates and trusts. He is certified by The Florida Bar in wills, trusts, and estates law and received his J.D., cum laude, from the University of Miami School of Law.

Matthew N. Turko is an associate in the Naples office of the law firm of Cummings & Lockwood, LLC, where he practices in the wealth protection practice group. He received his J.D., magna cum laude, from Stetson University College of Law.

This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Sandra F. Diamond, chair, and William P. Sklar and Richard R. Gans, editors.

Real Property, Probate and Trust Law