The Georgia Supreme Court recently answered certified questions from the Eleventh Circuit Court of Appeals regarding whether a single premium annuity was exempt in a Chapter 7 case, where the annuity was purchased a year before filing with $220,000 in inherited funds.  A debtor’s transfer of $220,000 a year before filing Chapter 7 is certainly going to get the attention of a Trustee, and that was true of this case. However, in a significant win for the Debtor, the Georgia Supreme Court held that the annuity was exempt under Georgia law.  The case is Silliman v. Cassell, 2013 Ga. LEXIS 157, (Ga. Feb. 13, 2013) (click here for opinion).  The facts, as stated in the opinion, are as follows:

In 2008 [Debtor] inherited $220,000 from a relative. After consulting with advisors, she used the inherited funds in May 2009 to purchase a single-premium fixed annuity from National Life Insurance Company. [Debtor] was 65 years old at the time she purchased the annuity. The annuity agreement provides that beginning in June 2009 and until the time of her death, [Debtor] shall receive monthly annuity payments of $1,389.14. The agreement guarantees payments for ten years regardless of when [Debtor] dies and names her children as beneficiaries should she die within the guaranteed payment period. [Debtor] is not authorized to withdraw any funds from the annuity, cancel the annuity, or change the payment terms of the agreement. She is authorized to assign the right to the annuity payments and to change the name of her beneficiaries during the guaranteed period.

On May 11, 2010,  [Debtor] filed a Chapter 7 bankruptcy petition in the Bankruptcy Court for the Northern District of Georgia and she included the annuity as an asset. However, she also listed the annuity as exempt property under OCGA § 44-13-100 (a) (2) (E). The trustee objected, arguing the annuity payments did not meet two of the requirements necessary to qualify for the statutory exemption, specifically that the annuity was not funded by employment related wages or benefits and the payments due under the annuity were not “on account of age.”

The Bankruptcy Court ruled in favor of the Debtor (click here for Judge Hagenau’s opinion) and the District Court affirmed (click for opinion).  The Trustee appealed to the Eleventh Circuit Court of Appeals which found no clear authority on point and certified the case to the Georgia Supreme Court (click here for Eleventh Circuit opinion).   The questions certified to the Georgia Supreme Court are the following:

  1. Is a single-premium fixed annuity purchased with inherited funds an “annuity” for purposes of OCGA § 44-13-100 (a) (2) (E); and
  2. Is a debtor’s right to receive a payment from an annuity “on account of … age” for the purposes of OCGA § 44-13-100 (a) (2) (E) if the annuity payments are subject to age-based federal tax treatment, if the annuitant purchased the annuity because of age, or if the annuity payments are calculated based on the age of the annuitant at the time the annuity was purchased.

Section 44-13-100(a)(2)(e) of the Georgia Code exempts the following property:

(a) In lieu of the exemption provided in Code Section 44-13-1, any debtor who is a natural person may exempt, pursuant to this article, for purposes of bankruptcy, the following property:

(2) The debtor’s right to receive … (E) A payment under a pension, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.

The Court first determined that the Debtor’s right to receive income was an “annuity” within the scope of the statute  as it was designed to provide income as a substitute for wages.  Debtor was self-employed, did not have access to an employer-funded retirement plan and testified she purchased the annuity to to support her in her retirement.  The Court rejected the Trustee’s argument that the annuity was not a substitute for wages because it was purchased with inherited funds and the argument that it was non-exempt because the Debtor exercised control over the funds.  To the contrary, Debtor only had a right to payments and they were only guaranteed for a certain time.  The Court also found no evidence to indicate the annuity was purchased for pre-bankruptcy planning.

The Court then addressed the second certified question –  whether Debtor’s right to receive annuity payments is on account of age for purposes of OCGA § 44-13-100 (a) (2) (E).   The Court answered the question in the affirmative.

Here, both the bankruptcy and district courts found the “on account of age” requirement was met because the National Life annuity contained penalties for withdrawal prior to a specific age. There also is evidence that the fixed periodic payment of $1,389.14 was calculated based, in part, on [Debtor’s] age at the time she purchased the annuity contract and that the annuity funds and/or payments may be entitled to certain tax advantages due to her age. See OCGA § 48-7-27 (a) (5) (A)-(E) (providing exclusion of up to $65,000 for retirement income, including annuity income, for taxpayers age 65 and older). These factors lead us to agree with the bankruptcy and district courts that for purposes of OCGA § 44-13-100 (a) (2) (E), [Debtor’s] right to receive payments under the National Life annuity are “on account of” age… We note generally, however, that when determining whether a right to receive payment is “on account of age,” courts should focus on whether the right to payment is causally connected to the payee’s age, not on the payee’s intent in purchasing the annuity.

Thus, the annuity was exempt in Debtor’s Chapter 7 case.

Interestingly, Justice Melton dissented with what I view as a compelling analysis.

Unlike any of the aforementioned types of payments, an inheritance has nothing to do with replacing lost income from an earned salary or an hourly wage. Rather, much like a winning lottery ticket, it is merely a windfall that immediately benefits the person receiving the funds, regardless of any salary or wages that the per-son may have earned during their working years or the age at which they received the inheritance. It makes no difference whether or not the inheritance is being collected through deferred payments as an “annuity,” even after one has reached retirement age, because,

 [i]f a debtor, whether of retirement age or not, could exempt any annuity payments he received, he could buy an annuity with his inheritance and thus exempt it from his estate. That would [*22] create a hole in [OCGA § 44-13-100 (a) (2) (E)] through which its legislative intent could be drained, and courts that have considered such a scenario have understandably rejected [such an] argument.

 In re Green, 2007 Bankr. LEXIS 1182 (Bankr. E.D. Tenn. 2007).

Indeed, in exempting certain benefits from the reach of bankruptcy, the legislature was not aiming to provide a vehicle through which anyone could simply set up an “annuity” to protect their assets from the consequences of bankruptcy. Only those annuities that replace lost income by being “akin to future earnings” are exempted. Green, supra, at *5. Such “annuities” “must be something like a retirement annuity, one funded by money traceable to wages or some other employment benefit rather than one purchased with monies entirely extrinsic to employment.” … To conclude otherwise would allow a person to unjustly exempt income that should be available to pay just bankruptcy debts simply by purchasing an otherwise qualifying annuity. Because the annuity here was purchased with inherited funds that had nothing to do with earned wages or some other employment benefit, it is not the type of annuity that would be exempted for purposes of bankruptcy pursuant to OCGA § 44-13-100 (a) (2) (E).