Lead Opinion
In this case involving the interpretation of OCGA § 44-13-100 (a) (2) (E)
For the reasons that follow, we find that a single-premium fixed annuity purchased with inherited funds may qualify as an exempt annuity under OCGA § 44-13-100 (a) (2) (E) and that the determination of whether a right to receive payment from an annuity is “on account of” age for purposes of OCGA § 44-13-100 (a) (2) (E) is not necessarily based on the existence of a single factor but requires consideration of a variety of factors pointing to the existence of a causal connection between the payee’s age and the right to payment.
Facts
1. As set forth in the opinion of the Eleventh Circuit Court of Appeals and revealed in the record, in 2008 Lou Ann Cassell 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. Cassell 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, Cassell shall receive monthly annuity payments of $1,389.14. The agreement guarantees payments for ten years regardless of when Cassell dies and names her children as beneficiaries should she die within the guaranteed payment period. Cassell 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, Cassell 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
Legal Analysis
2. Upon the filing of a petition for bankruptcy, “all legal or equitable interests of the debtor in property” become part of the bankruptcy estate. 11 USC § 541 (a) (1). Bankruptcy debtors may exempt certain property from their bankruptcy estate consistent with bankruptcy’s goal of ensuring that a debtor retains sufficient property to obtain a fresh start. 11 USC § 522 (b). See Marrama v. Citizens Bank of Mass.,
Here, Cassell contends the National Life annuity payments are exempt from inclusion in her bankruptcy estate pursuant to OCGA § 44-13-100 (a) (2) (E). That subsection provides, in pertinent part, that any debtor who is a natural person may exempt, for purposes of bankruptcy, the debtor’s right to receive:
[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.
To be exempt under this provision, the National Life annuity must meet three requirements: (1) it must be an annuity; (2) the right to receive the annuity payments must be “on account of illness, disability, death, age, or length of service”; and (3) the payments must be reasonably necessary to support Cassell or her dependents.
Is the National Life Annuity an Annuity For Purposes of OCGA § 44-13-100 (a) (2) (E)?
As recognized by the Eleventh Circuit, there is no Georgia authority interpreting OCGA § 44-13-100 (a) (2) (E) or more specifically, what constitutes an annuity for purposes of that subsection. Construed according to its plain and ordinary meaning, an “annuity’ is “[a]n obligation to pay a stated sum, usually monthly or annually to a stated recipient.” Black’s Law Dictionary 88 (7th ed. 1999). See Slakman v. Continental Cas. Co.,
If we were to apply only this definition of annuity for purposes of OCGA § 44-13-100 (a) (2) (E), every annuity regardless of its origin or purpose would be exempt from a debtor’s bankruptcy estate and protected from creditors. We do not believe this is the result intended by our legislature when it adopted OCGA § 44-13-100 (a) (2) (E). OCGA § 44-13-100 (a) (2) (E), like its federal counterpart, exempts from a debtor’s bankruptcy estate only those payments due under a “pension, annuity, or similar plan or contract.” Courts have limited the similar language in both the federal and state exemption schemes to mean that a debtor’s interest in an annuity, contract or similar plan may qualify for the exemption if it is intended to “provide income that substitutes for wages.” Rousey, supra,
[t]he common feature of all of these plans is that they provide income that substitutes for wages earned as salary or hourly compensation.
Like 11 USC § 522 (d) (10), OCGA § 44-13-100 (a) (2) exempts from bankruptcy a debtor’s right to receive social security benefits, unemployment compensation, public assistance benefits, retirement benefits, disability, illness or unemployment benefits, alimony, support or separate maintenance, and payments under a pension, annuity, or similar plan or contract. We agree with the Supreme Court that the common feature of all of these plans is that they provide income that substitutes for wages. Accordingly, we conclude that in deciding whether a particular annuity is of the type intended to come within the OCGA § 44-13-100 (a) (2) (E) exemption, the pertinent question is whether it provides income as a substitute for wages.
To make this determination, courts must consider the nature of the contract
Our analysis of these considerations leads us to conclude that the National Life annuity is designed to provide income as a substitute for wages. At the time Cassell purchased the annuity with her inheritance, she was self-employed and did not have access to an employer-funded retirement or pension plan. She testified she purchased the annuity to replace her income given her age at the time of purchase, 65, and to support her in her retirement. Consistent with this intent, she purchased a fixed-sum life annuity, giving her the right to immediate monthly payments but at the same time divesting her of the right to withdraw the corpus of the annuity. Thus, once the payments began and at the time of filing of her bankruptcy petition, Cassell was entitled only to the payments from the annuity and she had no authority over either the corpus or the amount or frequency of payments from the annuity.
Based on these facts, we reject the trustee’s argument that the National Life annuity cannot be an exempt annuity because it was funded by an inheritance. Although the trustee cites several bankruptcy cases from other jurisdictions which focus on the source of funds in determining whether an annuity, contract, or plan qualifies for the 11 USC § 522 (d) (10) (E) or a similar state exemption, these cases rest on the mistaken premise that the determinative factor is the source of funds used to purchase the annuity. See In re Green,
We similarly reject the trustee’s argument that the National Life annuity is not exempt because Cassell exercised too much control over it. Contrary to the trustee’s argument, Cassell’s ability to choose among several different plans for investment at the time she purchased the annuity is not significant. What is relevant and legally significant in this analysis is the nature of the plan actually
Working against Cassell in this analysis is the fact that she purchased the annuity just one year before the filing of her bankruptcy petition and that her investment was not made over an extended period of time. We, however, do not consider these factors sufficiently compelling in this case to satisfy the trustee’s burden of proving by a preponderance of the evidence that the payments were not intended to substitute for wages. See Fed. Bankr. R. 4003 (c). There is no evidence that the National Life annuity was purchased as part of a pre-bankruptcy plan to exempt assets from the bankruptcy estate. In addition, Cassell’s testimony that she was current on both personal and business expenses at the time the annuity was purchased and that she intended to use the annuity payments as a substitute for wages in her retirement is uncontradicted in the record before us.
Is the Right to Receive Payment under the National Life Annuity “on Account of” Age?
3. The second issue to be decided is whether Cassell’s right to receive annuity payments is on account of age for purposes of OCGA § 44-13-100 (a) (2) (E). Again, we find the Supreme Court’s decision in Rousey instructive. There, the Supreme Court considered the plain meaning of the phrase “on account of” as used in 11 USC § 522 (d) (10) (E) and interpreted it to be the equivalent of “because of.” The Court thus held that to be exempt from the bankruptcy estate, the right to payments from an IRA must be made “because of” illness, disability, death, age, or length of service. See Rousey, supra,
The requisite connection maybe established in a myriad of ways, proof of which is limited only by the circumstances under which the annuity is created and the terms and conditions of the annuity itself. In Rousey, the Court found the connection sufficient where the debtors’ access to funds was limited in a significant way based on their ages. Rousey, supra,
Although the second question certified by the Circuit Court asks whether certain factors are independently sufficient to establish the requisite causal connection between a payee’s age and the right to payment, we find it unnecessary to address that issue. Rather, the causal connection is established in this case through the amalgamation of evidence related to several different factors. 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. See Rousey, supra,
Certified questions answered.
Notes
This section of the Georgia Code provides that a bankruptcy debtor may exempt from the bankruptcy estate the debtor’s right to receive “[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.”
As stated, the trustee concedes the National Life annuity satisfies this third requirement.
11 USC § 522 (d) (10) (E) exempts from the bankruptcy estate the debtor’s right to receive a payment under a stock bonus, pension, profitsharing, 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, unless —
(i) such plan or contract was established by or under the auspices of an insider that employed the debtor at the time the debtor’s rights under such plan or contract arose;
(ii) such payment is on account of age or length of service; and
(iii) such plan or contract does not qualify under section 401 (a), 403 (a), 403 (b), or 408 of the Internal Revenue Code of 1986.
That is not to say that the source of funds cannot be a relevant consideration in a court’s determination of whether an annuity or similar plan is intended as a substitute for wages, only that the source of funds is not by itself determinative of this issue. For example, in In re Vickers,
Dissenting Opinion
dissenting.
Because Cassell’s annuity was funded by an inheritance, I cannot agree with the majority’s erroneous conclusion that the annuity in this case provided income to Cassell as a substitute for earned wages. Accordingly, I do not agree that the annuity here qualifies as exempt property for purposes of bankruptcy pursuant to OCGA § 44-13-100 (a) (2) (E).
Under OCGA § 44-13-100 (a) (2) (E):
[A]ny debtor who is a natural person may exempt, pursuant to this article, for purposes of bankruptcy,... 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[.]
As the United States Supreme Court has made clear, payment plans that would be exempted for purposes of bankruptcy include those that “provide income that substitutes for wages earned as salary or hourly compensation.” Rousey v. Jacoway,
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 person 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
[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 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 rej ected [such an] argument.
In re Green,
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.” Id. See also Rousey, supra,
I therefore respectfully dissent from the majority.
Contrary to the majority’s analysis, the fact that Cassell was self-employed and did not have access to an employer-funded retirement plan is irrelevant, as other instruments exist for the self-employed to plan for retirement well before reaching retirement age.