In a recent case, a federal court of appeals determined that a debtor’s monthly annuity payments were part of the bankruptcy estate and were not exempt under state law. The debtor filed a Chapter 7 bankruptcy claim and listed as an asset a $100,000 single premium annuity. She had purchased the annuity from Kansas City Life Insurance Company for $100,000 a few months after her husband died. She had sold her house and used the money to purchase the annuity. She elected to receive a monthly payment of $436 starting 30 days after she purchased the annuity, which would continue for the rest of her life. When the debtor filed her bankruptcy claim, she claimed the annuity as an exemption. The trustee objected, arguing it should not be exempted.
The debtor had claimed the exemption under a state bankruptcy exemption. The law allowed exemptions for plans that are necessary for the debtor’s support or the debtor’s dependent’s support, and that were made “on account of illness, disability, death, age or length of service.” In this case, the court found the plan was not made on account of illness, disability, death, age, or length of service.
The woman first argued she had purchased the annuity on account of death, since she purchased the annuity after her husband’s death to replace his income. The court explained that her reason for purchasing the plan was irrelevant. In contrast to a plan that is triggered upon the death of a certain person, here, the payments were not triggered by the husband’s death. For the same reason, the plan was also not made on account of age. The question the court asked was not what motivated her to purchase the annuity but instead what triggered her right to receive payments. In this case, the payments began 30 days after the annuity was issued, since that was when she chose the payments to begin. For these reasons, the court rejected the exemption and deemed the annuity part of the estate.