Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent Daniel Walker

UPDATED: Apr 3, 2022

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Generally speaking, an annuity is not garnishable. There are certain kinds of income which are exempt from being seized by creditors to pay a judgment owing, and the income received from an annuity would be one of them.

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Each state has its own laws about whether an annuity may be garnished to satisfy an unpaid debt. If you’re in a difficult situation, make sure you explore your options to pay the debt without garnishments. But you should also make sure you know the rules if there’s no way to avoid it. While some collections professionals do know what they can and cannot take, others may go for whatever they can get away with. Specifics on annuities and wage garnishment are provided below.

What should you know about annuities?

An annuity is a financial product that provides a steady source of income, and it is a choice available for people planning their retirement. The person buying the annuity, known as the annuitant, deposits either a lump sum or a number of small amounts into the plan. The money is invested by the insurance company on behalf of the annuitant.

Once the funds are invested in the plan, they grow on a tax-free basis until they are withdrawn. At that point, they are taxable to the recipient. An annuity may be set up to pay out an income over a set time period or for life.

The amount of money that the annuitant may receive from the annuity will depend on the amount invested in the plan and the payout schedule. An annuitant may choose to receive payments annually, semi-annually, quarterly or monthly. Once the annuity is in the stage where the annuitant starts receiving payments, a certain amount must be withdrawn from the plan each year.

Part of this is dictated by the annuity contract. So if you have any questions about distributions, long-term plans, make sure to talk to your plan administrator.

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How do garnishments work?

When a judgment creditor obtains a judgment against an individual and that person does not pay the amount owing, the creditor may take steps to recover the money by taking assets that belong to the debtor. The creditor may decide to seize personal property owned by the judgment debtor to satisfy the judgment. Wages may be garnished, as well as funds held in a bank account.

This could be because of a debt that went unpaid for a long period. It can also happen if you’re sued due to a claim, and you cannot or have not paid up front. If you’re sued, there’s a legal process that comes into play after you get sued and before they can collect via garnishments.

How can you avoid garnishment of an annuity?

Ideally, a debtor will pay the amount he or she owed voluntarily, and there will be no need for the creditor to garnish his or her wages or seize assets to satisfy the debt. If a person holding an annuity wants to avoid having a creditor attempt to garnish it, he or she should take steps to keep the money received from the annuity separate from any other income.

The money received from the annuity should be deposited into a checking account that is not used for any other purpose. That way, the money received from the annuity doesn’t become mixed in with any other sources of income the annuitant receives. The checking account should be held solely in the annuitant’s name to further keep these funds from being mixed with other money coming into the household.

If there is any dispute over who owns the funds in the bank account and whether they can be garnished, the court may order that the bank account be frozen until the matter is resolved. In a situation where a member of the household has a judgment signed against him or her, the annuitant will want to make sure that any funds being received from the annuity are kept separate as well.

He or she should inform the court that the funds in the bank account are benefits under an annuity and are not subject to garnishment. The annuitant will likely have to sign a document to this effect and file it with the court. Of course, all this is moot if you’re in a state that does not allow garnishment of annuities.

Even if the debtor lives in a state that allows annuities to be garnished, the amount on deposit with the insurance company is protected. The creditor will be paid out of the amount the annuitant receives monthly, or on the schedule the annuitant has chosen.

The creditor will only be paid from the proceeds of the annuity until the annuitant’s death. After that point, the creditor may be able to make a claim for any balance owing to the annuitant’s estate, depending on the location and the laws in effect at the time.

An annuity may be exempt from garnishment proceedings, depending on the state. To avoid having the funds received from an annuity becoming mixed with other sources of income and possibly being seized by a creditor, they should be kept in a separate bank account that is only used to receive annuity proceeds. Rather than having to be concerned about the possibility of annuity payments being seized, a better choice is for the debtor to pay the judgment as ordered.

If an annuitant is being threatened with garnishment, he or she should consult a qualified attorney to get advice for his or her specific situation.

Is life insurance creditor protected?

Some states fully protect the cash value and death benefits of life insurance and annuities, provided you buy them before you incur liability. A common protective strategy is to convert exposed investments into exempt or protected insurance or annuity products. We see many variations on this theme, and some are quite complex. For example, international private placement variable universal life insurance policies are popular planning tools.

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Is a private annuity right for you?

Before you ever run into a garnishment situation, you may think about your options for a private annuity. Whether you’re just setting up or taking the proceeds of annuity contracts, make sure to work with experienced financial professionals. They can advise you on the best next steps and help you make informed decisions that will serve you in the long run. If you’re facing judgment enforcement for any reason, they can also help to maximize your asset protection in legal ways.

In other words, you need to have your asset protection plan in place before these events happen.

The Bottom Line

Annuities as a whole are valued differently from state-to-state because each state has different tax laws and tax codes which can greatly influence the way a product is designed as well as how it pays out upon annuitization.

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