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PrintThe Annuity Exemption
You have the choice of numerous asset exemption options when formulating an effective asset exemption plan. Many states exempt annuities, although there is no federal bankruptcy exemption for annuities. An annuity is a fund that provides an equal periodic (usually monthly) amount of money to the purchaser. In most states the exemption for annuities is limited to a fixed dollar amount per month. However, in some states, for example, Florida, the exemption for annuities is unlimited in most cases.
Defined-benefit pension plans pay retirement benefits as an annuity. In that case, the receipts are exempt under the retirement plan exemption.
Many individuals purchase commercial annuities from insurance companies, typically as a supplement to their retirement earnings. The annuity exemption is primarily intended to cover commercial annuities. Thus, the purchase of a commercial annuity also serves as an asset protection device. It's particularly useful if you find that conventional retirement plans are too costly to set up, or you don't wish to fund a retirement plan that includes your employees.
Essentially, the cash used to purchase the annuity is converted to an exempt asset. Of course, as the cash is received back each month, it is re-converted to a nonexempt asset. The advantage to the annuity is that, during the entire period it is outstanding, you have a protected source from which you can draw income.
