by John Darer® CLU ChFC CSSC RSP CLTC
The Estate of the Minor is the default beneficiary designation for structured settlements payable to minors. Generally minors cannot make changes of beneficiary until they reach the age of majority. This could be a major estate planning dilemma where the child's parent already has (or parents have) a sizable assets, is (are) already a beneficiary of their own parent's sizable estate and/or is/ are high income earners (or potential earners) in their own right.
If an annuitant dies while receiving a structured settlement, the present value of any remaining future payments due to be paid after the death of the primary annuitant is included in the annuitant's estate. [ See generally 26 U.S. Code § 2039]
If under the laws of intestate succession, the beneficiary of a large minor's structured settlement is the Estate of the Minor, the resulting inheritance might not only be subject to Estate Tax , but the net inheritance would first amplify the parent's estate, with the resulting growth in present value on that inheritance as payments get closer to their due date creating a potentially major tax issue for THEIR beneficiaries.
Consider the following:
The Federal Estate Tax exemption is $5,430,000 for 2015. The Federal Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death (Refer to Form 706 (PDF)).
States also have Estate Tax exemptions
A. New York Basic Exclusion Amount
Dates of Death
April 1, 2015-March 31, 2016 $3,125,000
April 1, 2016-March 31, 2017 $4,187,.500
April 1, 2017-March 31, 2018 $5,250,000
B. Connecticut Applies Estate Taxes at a Lower Amount of Taxable Estate
Over $2,000,000 but not over $3,600,000 7.2% of the excess over $2,000,000
Over $3,600,000 but not over $4,100,000 $115,200 plus 7.8% of the excess over
Over $4,100,000 but not over $5,100,000 $154,200 plus 8.4% of the excess over
Over $5,100,000 but not over $6,100,000 $238,200 plus 9.0% of the excess over
Over $6,100,000 but not over $7,100,000 $328,200 plus 9.6% of the excess over
Over $7,100,000 but not over $8,100,000 $424,200 plus 10.2% of the excess over
Over $8,100,000 but not over $9,100,000 $526,200 plus 10.8% of the excess over
Over $9,100,000 but not over $10,100,000 $634,200 plus 11.4% of the excess over
Over $10,100,000 $748,200 plus 12% of the excess over $10,100,000
How big is this potential problem?
There are two major generational wealth transfers in play right now.
An estimated $12 Trillion will pass from those born in the 1920s and 1930s to Baby Boomers and their children. A larger wealth transfer will flow from Baby Boomers to their children over the next 40 years. One cannot just ignore the issue. Their children and family members suffer personal physical injuries in accidents, are victims of malpractice, or product defects, just like everyone else.
Can't you just gift it away?
Depends on the size of your case and the estate. You would need a lot of donees! There is an “annual gift exclusion” of $14,000 per recipient in 2015 ($28,000 per couple). The provision sets the amount that an individual can give, tax-free, to another person who isn’t a spouse. (Transfers between spouses are often tax-free.) There is no limit on the number of such gifts a taxpayer can make, as long as each is to a different person. One could give money to charity if so inclined.
Won't a Commutation Rider Solve the Problem?
Commutation Riders have been around for about 20 years and were originally designed to provide liquidity to pay estate taxes upon the death of the structured settlement annuitant. In 1995 we were looking at much lower exemptions. In the last 22 years, in New York for example, it has been also used to provide liquidity to pay of liens when a special needs/supplemental needs trust is used. Liquidity in a large settlement however, still places a large net amount that amplifies what may already be sizable assets which will then be compounded by future growth. Sounds like a nice problem to have except when you consider the pain the family or individual went through to get such a sizable recovery.
Petitioning the Court to Approve an Infant Compromise Order With Sibling Beneficiary
Some opine that a possible solution is to name a sibling, contemporary in age to the minor annuitant in lieu of the Estate, where a sizable chunk would default to the parents. There is still a potential estate tax due if the present value of the injured minor's remaining annuity at death exceeds the exemptions, but it may be an effective way to deal with the amplification and growth issue discussed above. Under the natural order of things the sibling will outlive the parents.
Assuming the court approves, the strategy could be implemented using two or more structured settlement annuities, the first with a commutation rider to provide liquidity help pay the estate taxes if the injured minor dies and the second to continue to help provide the asset growth and/or a guaranteed income stream.
This is not meant to be an exhaustive discussion on the subject. It is meant to stimulate thoughtful discussion on the topic. There may be other solutions. Always seek advice from qualified professionals