The Tennessee legislature has provided planners with a very powerful asset protection tool which often goes overlooked. Tennessee Code Annotated § 56-7-203 provides as follows:
The net amount payable under any policy of life insurance or under any annuity contract upon the life of any person made for the benefit of, or assigned to, the spouse and/or children, or dependent relatives of the persons, shall be exempt from all claims of the creditors of the person arising out of or based upon any obligation created after January 1, 1932, whether or not the right to change the named beneficiary is reserved by or permitted to that person.
Now, let’s make our way through the language of the statute and figure out why this is a valuable tool for those interested in asset protection planning.
It has long been known that the benefits paid under a life insurance policy were exempt from the claims of creditors of the estate, as long as such proceeds were paid for the benefit of the spouse and/or children of the decedent. At first, reading this is all that this statute reiterates to the reader. The “net amount payable” under such policy will be exempt from “all claims of the creditors of the person arising out of or based upon any obligation created after January 1, 1932”. Now, what this statute doesn’t provide expressly is the most interesting part of the protection afforded by the statute.
The bankruptcy case of In re Billington provides the real jewel in this crown: “Tennessee statute providing that life insurance or annuity for or assigned to spouse and/or children or dependent relatives is exempt from claims of creditors allows for the exemption of funds in annuity contracts and the cash surrender values of policies, rather than only the death proceeds payable under the contracts and policies.”
This is where the power of T.C.A. § 56-7-203 really becomes apparent. Clients who are interested in shielding some liquid assets from creditors (and they have already considered or implemented the use of a Tennessee Investment Services Trust) should consider purchasing a high cash surrender value life insurance policy. With this they are able to deposit a large lump sum with an appropriate insurance carrier in return for a life insurance policy with a commensurate cash surrender value amount. These vehicles are really classified more as investment vehicles than pure insurance vehicles. As such the client does not forego the use of the funds in an investment sense but still receives the powerful protection of the statute. Further, if funds are needed from the account, there are options available to the client in terms of withdrawal or borrowing against the funds.
Those who are concerned about protecting the family nest egg should at least consider whether a high cash surrender value life insurance plan is appropriate. One more arrow in the quiver in terms of protecting the family unit.
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