A:

Whether your variable annuity is protected from creditors depends on the state in which you live. About three-quarters of states provide variable annuity investors with at least some level of protection from creditors. Within these states, however, different rules exist. Some provide full protection with no exceptions. Others provide mostly full protection but impose specific exceptions, such as for annuities intentionally purchased immediately prior to bankruptcy. Still others protect variable annuities up to what they consider a reasonable amount but allow creditors to stake claim to the remainder.

Full Protection

A few states give variable annuity investors full protection from creditors. These states include Texas, Oklahoma, Michigan, Wisconsin and New Mexico. As far as creditors in these states are concerned, annuity income does not exist. If a person's entire net worth is tied up in variable annuities, he could be flush with money, but to his creditors, he might as well be flat broke.

Almost Full Protection

Some states provide what amounts to nearly full protection of variable annuities from creditors but implement what they consider common-sense exceptions to prevent abuse. For example, Iowa shields variable annuities from creditors but does not protect investors who intentionally dump large amounts of assets into an annuity during the year prior to bankruptcy. Louisiana's rule is even more cut and dry; annuities purchased within nine months prior to bankruptcy are not protected from creditors.

Partial Protection

States such as New York, Missouri and Georgia protect variable annuities from creditors up to what they define as a reasonable extent. Investors receive enough from their annuity distributions to live on, but the rest is fair game for creditors with valid claims. Courts determine on an individual basis what constitutes reasonable protection.

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