When Annuities Provide Better Asset Protection Than Homestead

The general rule is that when a debtor transfers or converts an exempt asset to another person, or to another form, there is no fraudulent transfer or conversion. If the transfer or conversion is reversed the property would revert to its initial exemption, and there is not harm to creditors from the transfer or conversion of an asset the creditors could not reach in the first place.

People need to be very careful, nevertheless, how they transfer an exempt asset if they foresee future legal problems. For example, Florida statutes protect the proceeds of an annuity. If a debtor sells an annuity and deposits the proceeds in a separate bank account the proceeds remain protected after the annuity sale. A transfer of the annuity proceeds from the bank account should not be a fraudulent transfer.

Proceeds from the sale or refinancing of homestead are treated differently. Pursuant to a Supreme Court decision proceeds from the sale of a homestead are protected only if they are intended to be reinvested in a new homestead within a reasonable time. Otherwise, once homestead equity is converted to cash the cash may be vulnerable to creditors even though the case represents homestead equity.

Consider for example a married couple whose homestead is owned in the name of the wife only where the wife takes out a home equity line of credit. If the wife draws a cash advance on the line of credit and deposits the proceeds in her bank account the proceeds become vulnerable to the wife’s creditors. If the wife transfers the line of credit proceeds to her husband the transfer could be attacked as a fraudulent conveyance. If the wife buys an asset with the homestead loan proceeds and titles the new asset in the husband’s name the transaction could be attacked as a fraudulent conveyance. On the other hand, the wife would defend a fraudulent conveyance action by arguing that the loan proceeds were put in her separate checking account only as a commercial necessity for the transfer of exempt homestead interest to her spouse. In this regard only, annuities are a better asset protection tool than homestead because of the express protection of annuity proceeds.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida