by John Darer CLU ChFC CSSC RSP
Did you know that termites have built "cathedrals"? That's right they don't just munch on your porch! It's ironic that the household pest, that the NSSTA uses as a catalytic methaphor for wealth erosion in comparing structured settlements to one aspect of trust accounts, is one of the world's most accomplished "architects". To wit, this "termite cathedral" in Queensland Australia...
NSSTA cites the old adage "it's not what you make, it’s how much you keep" when comparing trusts to structures, uses articles associated with retirement funds to prove its point, but inexplicably ignores the value of trusts in the settlement planning process.
NSSTA cites The Wall Street Journal reporter Ian Salisbury article this week about target-date funds. These funds combine stocks and bonds, with the ratio shifting toward bonds as the “target date” (usually an investor’s retirement) nears.
Citing a new federal report, Salisbury writes that some target-date investors pay up to nine times as much in fees as others pay. “The funds' high fees could end up adding years to the time many workers will need to punch the clock,” he writes.
NSSTA suggests that you keep that in mind when you’re settling a lawsuit.
That structured settlement payments are exempt from state and federal income taxes, as well as taxes on interest, dividends and the alternative minimum tax ("AMT"). With a structured settlement, there are no management or other ongoing fees.
By contrast, NSSTA says, "trusts are taxed at a rate equal to or higher than regular individual income taxes. Trusts also often require annual management fees, which further reduce the overall return".
- A balanced approach is a good approach.
- NSSTA's point is too simplistic. Taxation of trusts may be affected by whether the trust is a grantor, non grantor simple or complex. Many settlement trusts are grantor trusts which are generally taxed at the rate of the grantor. Rules on Taxation of Grantor Trusts
- Sometimes the reasons for using a trust in a settlement plan are more compelling than achieving the highest return. Said a different way, sometimes the highest return is not consistent with the goal of preservation of capital for those that are naturally (or by necessity) risk averse.
- Trusts may be funded with tax exempt obligations or managed for optimal tax efficiency, particularly when medicals are involved.
- Many NSSTA members actively use trusts as part of the settlement solution and NSSTA posts information about Special Needs Trusts on its home page. Trust vendors sponsor the NSSTA website and regularly attend NSSTA Regional and Annual meetings. Such an article needlessly disparages these sponsors and diminishes the intellectual credibilty of the trade association.