Discussion: Section 541(a)(1) of the Bankruptcy Code provides, in relevant part, that a debtor’s bankruptcy estate is comprised of “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). The Code allows debtors to exempt certain property from the bankruptcy estate, 11 U.S.C. § 522(b), but permits states to opt out of the federal scheme of property exemptions in favor of state-law exemptions.
11 U.S.C. § 522(d). Colorado has opted out of the federal scheme and enacted its own set of property exemptions for purposes of bankruptcy. COLO. REV. STAT. § 13-54-107. In this case, the Debtors listed in their bankruptcy schedules a Sun Life Annuity with a value of $16,818 (the “Annuity”), of which Mrs. May was both the owner and annuitant, and of which Mr. May was designated as a beneficiary in the event of Mrs. May’s death, claiming an exemption therein under section 10-7-106 of the Colorado Revised Statutes. That section provides:
Whenever, under the terms of any annuity or policy of life insurance, or under any written agreement supplemental thereto, issued by any insurance company, domestic or foreign, lawfully doing business in this state, the proceeds are retained by such company at maturity or otherwise, no person, other than the insured, entitled to any part of such proceeds or any installment of interest due or to become due thereon shall be permitted to commute, anticipate, encumber, alienate, or assign the same, or any part thereof, if such permission is expressly withheld by the terms of such policy or supplemental agreement; and, if such policy or supplemental agreement so provides, no payments of interest or of principal shall be in any way subject to such person’s debts, contracts, or engagements nor to any judicial processes to levy upon or attach the same for payment thereof.
COLO. REV. STAT. § 10-7-106 (emphasis in opinion). According to the Court, section 10-7-106 “prohibits a beneficiary, other than an ‘insured,’ from assigning an interest in an annuity or life insurance policy. It provides further that the proceeds of either an annuity or life insurance policy shall not be subject to ‘such person’s debts.’” Thus, the Court found, it protects the proceeds of an annuity from a beneficiary’s creditors. Specifically, the Court interpreted the statute as requiring as conditions to exemption that (1) the entity issuing the annuity or insurance policy must retain the proceeds; (2) the annuity or policy must have specific language restraining the alienation of proceeds by persons; and (3) the person claiming its protection must not be the ‘insured.’”
The Court concluded that the intent behind section 10-7-106 was to allow annuity plan proceeds, while retained by an insurance company, to keep the proceeds available for a beneficiary’s support.
With respect to Mrs. May’s Annuity, the Court concluded that the Annuity gave Mrs. May the option of receiving payments over time as an annuity, but also permitted the option of surrendering the Annuity at any time and receiving a lump-sum payment; therefore, it was not really an annuity, but an investment. The Court further concluded that the Annuity did contain sufficient restrictions on alienation to satisfy the statute; however, because Mrs. May, as the annuity owner, had the ability to assign and surrender the Annuity, she was not protected by the statute. Further, though Mr. May, as the non-owner beneficiary, was entitled to protect his interest in the Annuity under the statute, because all of his debts were jointly held with Mrs. May, the statute had no practical effect in protecting his assets from the reach of the bankruptcy trustee.
Key Quotation: “In order for § 10-7-106 to apply, an insurance policy must allow no person, other than the insured, to alienate or assign proceeds. In other words, the statute allows for the insured to have alienation and assignment rights, but protects only those beneficiaries who have no such control over proceeds.”
– Katherine Swan