Structured Settlements 4Real® Blog: Structured Settlements | Settlement Planning News and John Darer Reviews

Florida Inherited IRAs Protected From Claims of Creditors

by John D. Darer CLU ChFC CSSC RSP

Good news regarding Florida’s legislative efforts to statutorily protect inherited IRAs from the claims of creditors of a debtor beneficiary under Florida state law!  House Bill 469 unanimously passed both the Florida Senate and House and was sent to the Governor for signature.

HB 469 amends Section 222.21 by inserting the following underlined language:

 any interest in any fund or account that is exempt from claims of creditors of the owner, beneficiary or participant . . . does not cease to be exempt after the owner’s death by reason of a direct transfer or eligible rollover . . . including, but not limited to, a direct transfer or eligible rollover to an inherited individual retirement account as defined in s. 408(d)(3) of the Internal Revenue Code of 1986, as amended

HB 469 also adds Section 222.21(c), which provides that “this paragraph is intended to clarify existing law, is remedial in nature, and shall have retroactive application to all inherited individual retirement accounts without regard to the date an account was created.”

The governing law of the designated beneficiary’s domicile will control whether the assets of an inherited IRA are protected from the claims of the designated beneficiary’s creditors, not the governing law of the domicile of the retirement plan owner.

From the standpint of our readers, the benefit of the new bill may intersect with sthe lives of those who have survivor claims in airplane or automobile crashes, medical malpractice, wrongful death and other law suits. Settlement Planners advising Florida beneficiarie should become aware of how the inherited IRA is a resource.

Are Structured Settlements Subject to Federal Estate Tax?

by John Darer® CLU ChFC MSSC RSP CLTC

One often reads the advertising claims that structured settlement payments are "tax free". Such statements are misleading.

The TRUTH

1. To the extent a structured settlement payment represents payment of damages for personal physical injury or physical sickness, or payment for a worker sompensation claim, they are received by  the tax payer INCOME tax free. The relevant sections of the Internal Revenue Code are IRC 104(a)(1) and 104(a)(2)

2. Technically an estate is subject to tax, not a structured settlement.

3. At the death of the annuitant IF, and only if, there are any guaranteed certain payments remaining to be paid in the future, the present value of such payments is included in the decedent's estate along with other items such as the value of bank accounts, stocks etc. On a very basic level, if the total of such items exceeds the exempt amount then an estate tax would be due.  Exemptions apply on both a state and federal level.

4. There are techniques available to reduce or mitigate estate tax.

For more information about estate planning and your settlement,  please contact structured settlement expert John Darer at  888-325-8640

 

When Does Nontaxable Income From A Structured Settlement Become Taxable To An Estate?

by John Darer® CLU ChFC MSSC RSP CLTC

Structured settlements, referring to periodic payments from the classic personal injury version, retain their income tax status when paid to a beneficiary.

Payments under the classic structured settlement are for payment of damages which are of the form excluded under IRC 104(a)(2)  or IRC 104(a)(1) in the case of workers compensation payments.

Don't Worry You Can't Get IRD From Eating a Big Mac, Spicy Indian Food or a Chili Dog

Payments from such structured settlements are generally included in the taxable estate of the decedent.

If the present value of the unreceived payments (that will now be going to the beneficiary) together with other assets that form the decedent estate, exceed an exempt amount* an estate tax is due.

A complete discussion of the estate tax cannot be done justice in a short blog post, but generally the estate tax is due within 9 months of death. Furthermore there are estate or inheritance taxes on both the Federal and State levels. Through careful advance planning there are a number of technioques to mitigate the estate tax problem if it exists. For example, some people can effectively "prepay" the estate tax at a discount using life insurance and gift tax exemptions.

If we are talking structured settlements in the non classic sense, such as employment cases, structured attorney fees and other non qualified structured settlements used in taxable damage cases the same estate tax scenario applies. One must however be cognizant of the Income in Respect of Decedent issue (IRD).

IRD is not some new form of gastric reflux or the nickname for a numerical New York City subway line.  One could say it's a form of "income reflux". Income In Respect of a Decedent is the name given t o all types of taxable income earned, but not received by the decedent by the time of his or her death. IRD is NOT taxed on the final return of the decedent, instead, it goes on the return of the person or entity receiving the income. Sometimes this is the surviving spouse, sometimes the estate, sometimes some other beneficiary. IRD retains the same tax nature after death as it would have had if the decedent had received the item of income while alive. There is no step-up in basis for IRD items.

*$5MM on a Federal level. Check the state levels in your state.

No Lapse Guarantee Universal Life: A New Paradigm Shift?

by John Darer CLU ChFC MSSC RSP CLTC

Sun Life's pulling out from the No Lapse guarantee UL market represents the second major life insurer to jettison the popular product in the past couple of years. In early 2009 AXA Equitable stopped offering the product.

No Lapse guarantee UL came onto the market as a solution to those who had a long term or permanent insurance need but were turned off by the premiums of whole life. The early version of Universal Life was a popular alternative to whole life in the 1980s when interest rates were high as policy "buckets" were credited with "New Money" rates. It was thought that the new money crediting rate would facilitate a more flexible response to assumed increasing rates. The portfolio rate offered by many mutual insurers at the time was posited by UL purveyors as being more slow to respond.  The policies also offered the undisciplined flexibility to pay premiums or not, provided that there was enough cash in the policy "bucket" to pay non guaranteed expense and mortality charges.

As interest rates began to fall in the late 1980s-early 1990s, policyholders began to experience cash calls when their policy "bucket" from which expenses and mortality charges are withdrawn shrunk.

Some older insureds faced huge cash calls as the perfect storm of lower interest rates combined with increasing age related mortality charges accelerated the drain. A number of policyholders sued their agents alleging that the risk was not adequately disclosed. Enter no lapse guarantee UL

No lapse guarantee UL permitted an insured to know the minimum premium they had to pay to keep the policy in force even if the cash value dwindled to zero

The contract was contractually guaranteed not to lapse provided the minimum premium was paid. The initial product offerings provided such guarantees for  a limited period of time. In recent years the no lapse guarantees were available until as long as age 120.

Our sources tell us that insurers made hopeful actuarial assumptions that interest rates would increase and have been squeezed when they have actually drifted lower.  AXA's moment of clarity  was embodied in a withdrawal from the market was swift and abrupt, even ditching cases that were in underwriting. I should know. I had one of those cases!

The  low interest rate scenario is also meddling with insurers' assumptions used to set long guarantee period term insurance pricing.

All of this will impact consumers in a negative way as prices eventually adjust for new issues. For the moment No Lapse guarantee universal is still available, just from fewer life insurers and at higher prices.

House Passes Estate Tax Reform Bill and It's Good News!

The House passed H.R. 4154, which would:

1. permanently freeze the estate tax exemption at $3.5 million,
   
2. the estate tax rate at 45%, and
   
3. preserve the step up in basis
   

The bill passed by a vote of 225-200, with no Republicans voting for it and 26 Democrats opposed.  H.R. 4154 moved with statutory PAYGO however, exempted from the PAYGO requirement is an extension of 2009 rates for the estate tax (what was passed).  

Statutory Pay  As You Go Act of 2009  ("PAYGO")

Note: While structured settlement payments are income tax free, the present value of any structured settlement period certain or guaranteed lump sum payments remaining and due after an annuitant's death is included in the decedent's estate for purposes of calculating estate tax.