by John Darer® CLU ChFC MSSC CeFT® RSP CLTC
Inherited a structured settlement? It means that someone who you loved (and loved you), who has recently passed, was receiving structured settlement
payments that were part of the settlement of a legal case. Your loved one agreed to the payment schedule when the settlement was negotiated. If they were a minor at the time of the settlement, the settlement would have to have to have been agreed to by the minor's parents, or a court appointed guardian, Furthermore, the Court would have had to approve the overall settlement, including the structured settlement payments.
- If the structured settlement was created as payment for damages in a wrongful death, physical injury or physical sickness case, or the settlement was in resolution of a workers compensation claim the payments are going to pass to the beneficiaries income tax-free.
- A structured settlement offers a stable source of income that is unaffected by the ups and downs of the stock market, real estate market, or the recent municipality pension bubble where a number of cities have filed for Chapter 9 bankruptcy.
- If you are used to an income stream, the continuation of that stable income stream may be a source of comfort.
No Rush to Make Decisions for Structured Settlement Beneficiaries
If you have inherited a structured settlement, as a beneficiary should know that there is absolutely no rush to make any decisions about the structured settlement. If you are the named beneficiary, a claim will have to be submitted to the annuity issuer or assignee, which among other things will include a copy of the death certificate. You may need to prove you are the beneficiary. There may be other routine administrative forms if you want to have payments deposited directly into your bank account. You may also wish to name your own beneficiaries. Should you wish to do so, beneficiary changes must be in writing. Some insurance companies also require signatures to be notarized.
Some structured settlements have commutation riders which convert the future payments, in whole or in part, to a lump sum as of the date of death, if such commutation rider was part of the original settlement. A commutation rider on a personal injury structured settlement began to be seen on certain cases in or after 1995, when the IRS issued a Private Letter Ruling, blessing the income tax-free status of such commutations for the first time (subject to the conditions stated in the ruling). Commutation riders are commonplace on (1) large settlements where estate liquidity needs have been anticipated and (2) where structured settlement payments are made to a Supplemental Needs Trust and the deceased plaintiff was a New York resident at the time the legal case settled.
There are also companies that will buy the rights to future structured settlement payments. You've seen some of them on TV, or seen them advertised on the Internet. Perhaps you've received a mailer, or been badgered by phone calls. It may make sense to consider transferring some of your structured settlement payment rights, but only after thorough consideration of your needs, whether those needs can be satisfied from other sources, and the impact of a potential sale or transfer on your future benefits.
One situation where you may need to explore this option is if a structured settlement annuitant dies and the present value of the "certain" and/or "guaranteed" but not yet received structured settlement payments at date of the decedent's death exceeds the estate tax exemption amount. Hard to do in 2021 with today's thresholds (updated). If there is no liquidity in the estate to pay the estate or inheritance taxes then a sale of a portion of structured settlement payment rights may be necessary.
An important caveat is that there is no regulation of the sales practices of these secondary market companies at this time. The state in which you reside likely has a Structured Settlement Protection Act (SSPA) which requires a court approval process to determine whether any attempt to sell payments is in your best interest (updated). Of such companies, there are some ethical practitioners, but many vultures who exhibit (or have exhibited) questionable business methods and scam people out of their money with aggressive sales tactics.
All in all a structured settlement beneficiary should take their time. Consult with the structured settlement consultant who created the structured settlement, if you know who that is, your lawyer, or an independent financial professional who is a structured settlement expert. Only deal with licensed and credentialed experts.