Annuities are a common tool for investment, financial and estate planning and asset protection.  An annuity is simply a contract between a person and an insurance company in which the person makes a lump sum payment to the insurance company in exchange for regular disbursements of money that start either immediately or at some definite time in the future.    At its core, an annuity is really a form of investment or insurance that entitles the investor to a series of annual payments.

Closely related to annuities are life insurance policies.   Like annuities, life insurance policies are contracts of insurance but, unlike annuities, life insurance is specifically intended to pay death benefits to designated beneficiaries.   The policyholder pays premiums to an insurance company which issues a life insurance policy guaranteeing payment of the purchased death benefit to the named beneficiaries once the insured passes away.

Since I have long represented persons and companies with respect to debt collection and judgment enforcement, I have been asked numerous times through the years whether a judgment creditor, i.e., one who has a monetary judgment in her favor against someone, can collect on that judgment from either an annuity or the cash surrender or proceeds of a life insurance policy purchased by the judgment debtor.  The answer, at least in Florida, is a pretty emphatic “no.”

Florida Statutes Sec. 222.13(1) provides:

(1) 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.

Similarly, Florida Statutes Sec. 222.14 states

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.

The above law is very clear.  Someone holding a judgment that remains outstanding must look to sources other than annuities or the cash surrender or proceeds of life insurance policies—unless the life insurance policy specifically provides otherwise—in order to enforce that judgment.

In preparing a Will, parents of a special needs child must give careful thought as to how to divide up their assets among multiple children. In deciding how to allocate resources, consideration should be given to the financial needs of each child, the ability of each child to support himself or herself both currently and in the future and the message sent to children in the decision of how to divide assets. There is no right or wrong answer but the general default rule of estate planning to leave assets equally to children should not be an assumption which is accepted without careful consideration.

When all children are very young, often assets are divided equally among children since all children are dependent at that time. As children get older, where a special needs child will have a large portion of his or her needs met through government assistance and may not have the expensive lifestyle of other children, some parents cap the amount allocated to that child (after ensuring sufficient assets are available to supplement monies from government assistance to provide the lifestyle the parent wants for such child) with the balance of the assets distributed to the other children.

Alternatively, parents may decide that other children will be able to support themselves in the future so a larger share of the estate should be allocated to a special needs child.

In considering this issue, the value of the assets to be divided up must be considered as well as the anticipated expense of each of the children and potential sources of payment of these expenses (earned income, governmental benefits, potential outside inheritances, to name a few). Further, since all of these variables change over time, the decision on how to allocate assets among children should be revisited every few years.

In implementing an estate plan for the benefit of your family, it is critical to take into consideration the role of life insurance. Life insurance can provide a source of liquidity for your family, including a child with special needs, following a death. A special needs trust without adequate funding will not properly care for your child with special needs.

There are many forms of life insurance and it is important to take into consideration the form of insurance that best fits your needs. When a child with special needs is involved, it is important that you have insurance that will be available at the time of death.

A term policy is much less costly than other forms of insurance, however, it is the least likely to be available at the insured’s death. This is because term policies typically last for a term of years with a level premium during that term or through the time the insured reaches a certain age, such as age 70.  As you get older, with most forms of term insurance, the cost of the insurance (the premium) rises dramatically. Both due to restrictions in the policy which terminate the policy at a certain age and since it becomes prohibitively expensive as you get older, these policies are often dropped or terminated long before an insured’s death. Therefore, it is important to consider the role of permanent insurance in your estate plan. There are several kinds of permanent insurance. For example, guaranteed universal insurance (the kind which provides a death benefit with little cash surrender value) and whole life insurance, which can be an investment vehicle for your family, can play an important role in planning. This is a more costly form of insurance, however, it is more likely to pay when the insured dies, and in some cases can be used as an investment.  Where cost is a factor, a term policy which is convertible in the future to a permanent product can be utilized.

No matter what the form of insurance, it is not enough to have appropriate planning documents, without confirming with a financial advisor that there are sufficient assets in the special needs trust to adequately provide for your child with special needs.  Where there is a shortfall, insurance can fill the void.

Estate planning is an important aspect of an overall financial plan for any individual, but it takes on even greater significance for the parents of children with special needs. Parents of children with special needs face a number of unique estate planning decisions that should be carefully considered with professional assistance. These considerations include:

Naming guardians. If parents pass away, who will provide day-to-day care for the special needs child? This is a critical and difficult decision and must be provided for in the parents’ Wills.

Creating a special needs trust.  A special needs trust is a trust that permits (but does not require) distributions to a child with special needs for a variety of reasons. Often, distributions are permitted only to supplement but not supplant monetary support that the individual is receiving from governmental benefit programs such as Social Security Disability Income (“SSDI”), Supplemental Security Income (“SSI”) and Medicaid. Failure to create a proper special needs trust can inadvertently disqualify the special needs child for these programs. The trust structure is also important to ensure that assets are not placed in a child’s hands before the child is responsible enough to invest and use the assets prudently (if ever).

The choice of trustee for a special needs trust is another critical decision. A trustee should have financial savvy, should have the parents’ complete trust, and should be or become knowledgeable regarding the child’s needs.

Powers of attorney.  A power of attorney allows an individual to appoint people to manage his or her assets and make investment decisions on his or her behalf. Having this document avoids the necessity of having to go to court to get someone appointed as a guardian if an individual cannot manage his or her own affairs. A power of attorney is important for all individuals, but in a special needs situation, it is important for both the parents and the special needs child.

Parents of an adult child with special needs should also consider whether a power of attorney is adequate or if parents should be named as guardians of the adult child to better protect the child’s interests. If there is a concern that the child cannot adequately manage his or her own affairs at all or could be taken advantage of, a guardianship (full or limited) may be more appropriate.

Life insurance. Life insurance is typically used to ensure that sufficient assets are available to provide adequate income to the surviving spouse and to provide for the care of children until they finish schooling and are able to earn a living. In a special needs situation, life insurance can be used to fund a special needs trust to ensure there will be assets available for the rest of the child’s lifetime. This may be especially important if parents can no longer provide the care the child needs.

While estate planning is essential for any individual, for a parent with a special needs child it takes on additional significance.