A common question asked of us is the status of cash values of deferred annuities – is annuity cash value subject to the claims of the contract owner’s creditors? This is a matter governed by state law, not federal law. Each state has its own laws listing assets that are subject to the claims of creditors and specifying which assets are exempt.
Often, the state statute is vague on this point. A typical state statute may state “annuities” are exempt without defining the term annuity. Other state laws exempt “annuity payments” either totally or partially. An example of a partial exemption would be, say, the first $500 per month of annuity payments is exempt. Rarely is cash value of deferred annuities specifically addressed.
With this background, we find a recent Eleventh Circuit U.S. Court of Appeals decision (Sawczak v. Goldenberg, 218 F.3rd 1264) interesting. Here are the facts of that case: Shirley Sawczak sued Dr. Alan Goldenberg for medical malpractice and won a $4,000,000 judgement. Dr. Goldenberg filed bankruptcy and listed assets of $3,791,119, claiming $3,751,678 of the assets were exempt under applicable Florida law. Among the assets he claimed as exempt werre seven deferred annuity contracts having total cash surrender value of $355,984.
During the bankruptcy proceedings, Sawczak objected to the inclusion of the annuity cash values in exempt property. She claimed the Florida exemption statute applies only to annuity payments and not annuity cash surrender values. The bankruptcy court reviewed the Florida statute and overruled the objection, stating that neither the title of the law, nor its text distinguishes between annuity payments received upon annuitization of the contract and surrender values received prior to contract maturity.
Sawczak appealed the bankruptcy court decision to the U.S. District Court. The District Court agreed with Sawczak and reversed the bankruptcy court ruling. The District Court held the cash value of the contracts did not constitute an “annuity” but were instead merely a revocable option to purchase an annuity upon maturity of the contract. The court ruled the funds on deposit with the insurance companies were not exempt under the Florida statute and could be attached to satisfy the judgment.
Dr. Goldenberg appealed the District Court decision to the Eleventh Circuit Court of Appeals. He claimed the contracts in question were indeed “annuity contracts” and therefore exempt under the Florida statute. He further claimed Florida law makes no distinction between annuity cash values and annuity payments. Sawczak continued to allege that the contracts in question were not “annuity contracts,” but merely options to buy annuities at a later date. She asserted Florida law protects only annuity payments and not cash surrender value.
Neither Sawczak, Goldenberg, or the Eleventh Circuit Court of Appeals, was able to find any Florida court decision addressing the issue at hand. Because of the lack of any Florida ruling on the issue, the Eleventh Circuit certified the question to the Florida Supreme Court for an interpretation of the applicable Florida state statute concerning exemption of annuity contracts from the claims of creditors. At the time of this writing (11/2000), the Florida Supreme Court has not ruled yet.
To recap, the bankruptcy court ruled cash values exempt, the U.S. District Court said they are not exempt, and the Eleventh Circuit Court of Appeals says no one knows the answer for sure and certified the question to the Florida Supreme Court. It will be interesting to see how the Florida Supreme Court rules as this is an open issue for other states as well.
Printed with permission of Advanced Underwriting Consultants
Last Updated: 12/15/2002 11:10:00 AM