by John Darer CLU ChFC CSSC RSP
A paper written by Boston lawyer Alexander Bove, Jr in 1997 and still posted in February 2012 on the Bove Langa website, discusses a "not readily soluble tax trap thought about by all too few personal injury attorneys and covered by virtually none of the structured settlement arrangements" is outdated. Moreover, the continued posting of paper on the law firm's web site fails to recognize industry changes contemporaneous with the time the paper was written.
The paper, originally published in the August 18, 1997 Massachusetts Lawyers Weekly, discusses the estate tax exposure with guaranteed structured settlement payments that continue to beneficiares beyond the primary annuitant's death (including potential interest charges if an extension is sought) in the context of estate liquidity.
Yet in the works at the time the Bove paper was published was a request for an IRS Private Letter Ruling by Allstate Life Insurance Company about a commutation rider which would serve to commute any remaining structured settlement payments to a lump sum at death. The lump sum would be based on a fixed an determinable formula and would have to be elected at the time the settlement was consummated (i.e. not after the settlement was concluded). Althought it may not be cited as precedent the IRS concluded in PLR 9812027 (issued December 18, 1997) that both the commuted lump sum as well as any remaining non commuted structured settlement payments) would continue to received an income tax exclsuion under IRC 104(a)(2). Key factors in the ruling were:
- Contemplated in the original structured settlement documents and funding annuity;
- Caused by events outside the payee's control (i.e death);
- The payee has no ability to affect whether a commutation might occur; and
- The commutation is made to the payee's beneficiaries and not to the payee.
Thus any added estate tax liquidity problem created by a structured settlement could be solved to a degree. Since 1997 the majority of life insurance companies writing structured settlement annuities have a version of a death commutation rider. As an alternative, life insurance can be purchased to poprvide estate liquidity, provided the annuitant is insurable.
According to the meta data of the pdf of the document on the Bove Langa PC site, the .pdf was created April 25, 2008, almost 11 years following the PLR. The structured settlement watchdog calls on Bove and Langa to update the information on their site.