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Besides stability, annuities provide protection from liabilities, creditors

by Joseph Arroyo | Contributor
June 30, 2020


Many of us don’t think about it, but exposure to certain liabilities can have a major impact on our finances – and retirement plans. People in high-liability industries have a legitimate need to consider shielding assets from creditors. Annuities can be a great tool for accomplishing this, especially when you’re already maximizing your traditional retirement plan contributions.

Why the need to shield assets?

There are many higher-risk professions, ranging from doctors to entrepreneurs to long-haul truck drivers, that require asset protection. Doctors face liability from malpractice claims as well as slip-and-fall type lawsuits. Long-haul truck drivers can face lawsuits from traffic accidents or damaged merchandise. Entrepreneurs, depending on the industry, can face liability from creditors, customers or even regulators. While the higher income-earning potential of these careers is intriguing, years of hard work and savings can be wiped out from a single lost case. Hence the need to use financial vehicles that allow for accumulation of assets combined with creditor protection.

A common tool used to accumulate assets, and shield them from creditors, are qualified plans. Retirement plans that are qualified under ERISA are shielded from most creditors. These plans include:

  • 401(k) / profit-sharing plans
  • Money purchase plans
  • Defined benefit plans

These qualified retirement plans can serve you well, but you may not be able to keep enough assets in them. Due to contribution limits, you may need to shield far more money than you can contribute to a qualified plan. This is just where annuities prove most useful.

Overview of annuities

Annuities offer tax-deferred growth and creditor protection. Annuities don’t have the same amount of investment options as qualified plans, but they do offer some major advantages:

  • Flexibility of withdrawals
  • Ability to make unlimited contributions
  • Possibility of guaranteed income for life
  • Possibility for stock market exposure with downside protection

It is true that annuities are subject to the same early distribution (before 59½) rules as qualified accounts. However, with an annuity, you can easily avoid this by taking distributions in a systematic manner. This is known as a 72(t) exception. To meet this requirement, your distributions must:

  • Be substantially similar (according to a formula – they can’t be random amounts)
  • Occur for at least 5 years, or until you reach age 59½ – whichever is longer

Using the 72(t) exemption, you can take a stream of income at any age and avoid paying a penalty for early withdrawal.

It’s important to know that these substantially similar payments are still taxable to the extent that they represent interest or investment gain. Annuities are uniquely suited to this method due to one of their other features: the ability to pay a monthly income for the duration of your lifetime.

Annuities are designed to pay you a stream of cash over the course of your life. Depending on the options you choose, this amount can be guaranteed for life. This makes taking substantially equal payments very easy – that’s what annuities are designed for. It’s also comforting for many people to know that they’ll have a monthly income source for their entire life and won’t outlive annuity payments.

Another benefit of using annuities for asset protection is that you can actually be exposed stock market gains while protecting yourself from market losses. You can accomplish this with indexed annuities. With indexed annuities, your rate of interest is tied to the performance of one or more financial indices.

When those indices rise, your interest rate can be much higher than for a fixed-rate annuity. The great part, though, is that if the market is down and the indices decline, you don’t lose money. With fixed indexed annuities, you’re guaranteed not to lose money, no matter how bad the market fares.

Annuities can function in one of two ways:

  • You can make a single large deposit (premium), and begin receiving income right away. This is known as an immediate annuity.
  • You can make a series of premium payments that accumulate interest for years and elect to receive payments sometime in the future. This is a deferred annuity.

You can utilize either type of annuity in your asset shielding strategy. You might elect to deposit a large accumulation of savings into an annuity, as well as make ongoing premium contributions from your cash flow. These funds will grow with interest (especially if an indexing strategy is used) and will be available to pay you income at any age.

Annuities for creditor protection and your financial plan

It’s very important to use annuities within the context of your retirement and estate plans. Always talk to your advisors before making changes to your investments. This is especially important for annuities because they can come with high surrender charges in the early years of your contract. You want to be sure you’re committed to the strategy for the long term before you purchase an annuity. With the right foresight, however, they can provide asset accumulation, guaranteed income and creditor protection.

Gavel sitting on stack of hundred dollar bills

Advanced planning is very important for another reason: If you become subject to a lawsuit it will be too late to utilize some of these strategies. You must have the funds protected in annuities before the need arises.

A very high-profile example of this can be seen in the OJ Simpson case. Despite being subject to a judgment of more than $30 million, he has able to maintain a high standard of living. This is because he had millions of dollars in creditor-safe vehicles like retirement plans and annuities. He also purposefully took advantage of Florida’s homestead laws, and was able to shield even more money by owning a home there.

For a similar reason, many liability-protection professionals recommend that high-risk earners pay off their homes entirely and keep all non-qualified assets in annuities. Notice that these asset-protection moves were made before any liability was incurred.

Regardless of how you feel about the OJ Simpson case, it’s a good illustration of how annuities can protect your hard-earned savings. And, taking the emotion out of his specific case, if you find yourself the defendant in a lawsuit, you may feel a sense of confidence knowing that much of your assets are protected from lawsuits you may find frivolous.

Alliance America can help

Alliance America is an insurance and financial services company. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.

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