Generally, private annuities are not safe in bankruptcy. In fact, they attract a lot of attention in bankruptcy cases because of their “non-exempt” status. However, in Indiana and the majority of other states, private annuities held in a tax-exempt, tax-deferred retirement account such as an IRA can be fully exempted (or protected) during Chapter 7 bankruptcy.
If an IRA annuity came from a long-term, normally-contributed source, then they are usually exempt in Chapter 7 bankruptcy in most states. There have generally been holdings going in this direction through the majority of bankruptcy districts. Make sure to check with your attorney in your own district to predict whether your IRA annuity will be safe in Chapter 7.
The IRS annuity account must come from a normally-contributed account. This makes sure that the normal annual contribution amounts were followed. All normal tax-deferred, tax-exempt protocols must have been followed in the past. An annuity usually can cost between $100,000 to even $500,000 to purchase. Therefore, it is obvious that you cannot purchase any large annuity account from an outside, non-retirement account and expect it to be exempt in bankruptcy. This would blow its proper tax-exempt, tax-deferred status. It could be much more vulnerable as an asset than in Chapter 7.
Check the source account to determine that all funds that funded the IRA annuity came from an IRA, 401(k), or other proper tax-exempt, tax-deferred source. If you can trace the $200,000 or whatever value back to an old 401(k) to fund the annuity, then you will probably be in good shape when you file Chapter 7. Also, document the non-taxed rollover amount with a 1099 or other documents from the IRA servicing company.
Remember, private annuities of any form draw attention in Chapter 7 bankruptcy. Make sure to get all of your documentation in order and check your local state bankruptcy holdings on this issue before attempting to exempt IRA Annuity accounts. Also, check why the annuity account was purchased. Was it simply to avoid market fluctuations and get a set percentage return? Are all funds being circulated back into the account? If so, then it is more obvious that the annuity setup is simply being used as a retirement fund instead of for some other purpose. A bankruptcy attorney should review any private annuity and make a prediction as to whether it will be exempt in bankruptcy. This analysis should probably also be applied even with IRA annuities, regardless of them being frequently exempt in bankruptcy.