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

Why Name a Beneficiary on a Large Structured Settlement For a Minor?

by John Darer® CLU ChFC MSSC CeFT RSP CLTC

The Estate of the Minor is the default beneficiary designation for structured settlements payable to minors.  Generally minors cannot make a change 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) 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

For example:

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
$3,600,000

Over $4,100,000 but not over $5,100,000                 $154,200 plus 8.4% of the excess over
$4,100,000

Over $5,100,000 but not over $6,100,000                 $238,200 plus 9.0% of the excess over
$5,100,000

Over $6,100,000 but not over $7,100,000                 $328,200 plus 9.6% of the excess over
$6,100,000

Over $7,100,000 but not over $8,100,000                 $424,200 plus 10.2% of the excess over
$7,100,000

Over $8,100,000 but not over $9,100,000                 $526,200 plus 10.8% of the excess over
$8,100,000

Over $9,100,000 but not over $10,100,000               $634,200 plus 11.4% of the excess over
$9,100,000

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

Term Insurance Available As Late as Age 85, if Insurable | 203-325-8640

by John Darer® CLU ChFC MSSC RSP CLTC

You may not be aware that it is possible to buy term life insurance up to age 85.  Level premium terms of 5, 7,10,15 and 20 years are all available to those who are insurable.

• Term insurance plans that are expiring can be renewed beyond age 85 depending on the company.
• Underinsured insurable seniors with ability to pay, or with children or trusts with the ability to pay, premiums can take steps to fill the coverage gap.

 

 

 

Inherited IRA Can Be Tapped By Creditors Says Supreme Court in New Ruling

by John Darer CLU ChFC CSSC RSP CLTC

The United States Supreme Court  (SCOTUS) ruled that inherited Individual Retirement Accounts (Inherited IRAs) ARE NOT shielded from creditors in bankruptcy proceedings, a decision that clears up confusion about the status of IRAs that parents leave to their children.

While bankruptcy law typically protects retirement assets from the reach of creditors,  unlike a typical IRA, money in an inherited IRA can be withdrawn without waiting for the new owner to retire. The Supreme Court reasoned that this change in the status of the account is readily available to payoff creditors.

In the underlying case, a Wisconsin couple, Heidi Heffron-Clark and her husband, declared bankruptcy and were seeking to protect an IRA that she inherited from her mother.

Cite:  SCOTUS  Clark v. Rameker, 13-299.

Long Term Care Solutions Summit 2014

by John Darer® CLU ChFC MSSC RSP CLTC

An understanding of long term care and a plan for long term care financing is critical for families well before an age where you or they may need it.  If extended care is needed, for any reason, failure to plan may result in limited choices and control over the setting in which care will be delivered and may seriously affect the financial viability, quality of life and well-being of the family members, not just the individual who needs extended care.

As a settlement expert, it's not difficult to see how long term care and extended care intersects with planning needs for certain types of personal injury cases as well as a broader universe that includes the lives of stakeholders in these cases and their families. 

Which leads me into why I opted to spend a beautiful spring weekend in Kansas City**.

The American Association for Long Term Care Insurance  (AALTCi) put on an outstanding educational program at the 2014 Long Term Care Solutions Summit held May 18-19 2014 at the Westin Crown Center in Kansas City, Missouri.  Some of the topics included:

• Understanding the pros and cons of life insurance with chronic illness benefits
• Alternatives and companions to long term care insurance
• How to sell linked benefits
• LTC Hybrids
• Home care benefits as the Long Term Care Policy Optimizer
• What to do with uninsurable clients: Options That Benefit All
• Your Role as a Client Advocate: Strategies that minimize claim delay and rejection
• Selling Short Term Care
• Selling Annuities With Long Term Care: A How To Succeed Crash Course
• Converting life insurance to pay for long term care
• Aging in Place
• Reverse Mortgages
• Medicaid Complaint Annuities
• The new HIPAA Omnibus Rule and how it impacts LTCi.

and a slew of sessions for attendees that provided extensive sharing of sales process and counseling techniques from industry leaders for producers of all levels, technology and social media.  There was an extensive array of exhibitors which included product and solution providers, IMOs,  health care advocates and more. 

One product provider now offers an inexpensive "starter" long term care insurance program targeted to individuals in their 30s and 40s. in an effort to attract young healthier premium dollars.  It is a very smart move for the LTC product provider.  I bought LTC insurance at age 38 at the same time we bought LTC insurance for my parents. For a comparably modest premium, with the built in 5% benefit increases, the benefit should be over $700 per day by the time I'm 65. 

I was as impressed with the 2014 Long Term Care Solutions Summit as I was with the November 2012 conference in Las Vegas.

**as part of an ambitious overall LTC continuing education and enrichment program in May 2014 that includes the ominously titled "LTC Boot Camp".  In March 2013  I completed my professional Certification in Long Term Care (CLTC)

 

Breast Cancer and Availability of Life Insurance

by John Darer® CLU ChFC MSSC CeFT RSP CLTC

Nearly one in eight U.S. women develops breast cancer at some time in their lives.  Men are not immune from the disease, as one of my high school classmates, a survivor, can attest. 

Whether you are a young mother or father with a need to protect your children and your family, or you have an estate planning need, to protect your wealth,  or a special needs child or adult, a history of breast cancer diagnosis is not an automatic decline for life insurance.

Breast Cancer Stages and Life Insurance Underwriting

• Most Stage 0 and many stage 1 breast cancers can be considered at standard rates after treatment.
• Most Stage 2 breast cancers can be considered one to two years after treatment, usually with a temporary flat extra rating.
• Stage 3 and 4 usually require a postpone period of three to five years before any coverage can be offered.

Background

The underwriting on breast cancer is primarily based on the Stage, 0 to 4. Stages 0 to 2A are considered localized just to the breast, where as Stages 2B to 4 are more advanced and usually have lymph node involvement or metastasis to other areas.

Treatments of breast cancer usually involve surgery (lumpectomy or mastectomy) followed by radiation therapy and/or chemotherapy, depending on the severity of the cancer. Additional treatment advances have been made with earlier diagnosis and therapies, together with gene testing, hormones, etc.

 

I have 40 years of experience in life insurance. For more information and/or a consultation,

 

Please call John Darer at 888-325-8640 

 

Image source Cleo/Dreamstime

Last updated January 15, 2024

Doing Good by Selling Your Annuity? | Here's a Better Charitable Giving Strategy

by John Darer® CLU ChFC MSSC CeFT RSP CLTC

Is it a smart financial move to sell your structured settlement or annuity to make a charitable donation?

Conshohocken based settlement purchaser CBC Settlement Funding apparently thought so at the time this blog was first published. CBC admonished readers of its blog  that "you can’t take it with you. That’s why many individuals may wish to make a cash gift to fund a college endowment or other charitable organization. For some, selling an annuity can be a way to fund charitable giving". 

Tell you what, John Darer® has a much better charitable giving strategy

If you were to consider following CBC Settlement Funding's advice, it could mean that you no longer need the periodic payments that the structured settlement provides. If that is the case then I have an important questions for you. How is your health and do you smoke?

If you can qualify for life insurance, how about keeping the structure as is and using the income stream on the structure (to extent it is surplus to requirements) to fund premiums on a life insurance policy that is applied for and owned by your favorite charity?  

Charitable Life is a time tested concept used to fund endowments for hospitals and universities. Often such policies are paid with donations of premium by donors.  With the structured settlement you've already got, there is a ready made source of premium for the life insurance. You simply must be insurable and have a long enough annuity payment stream.

Advantages of a Charitable Life Insurance Giving Strategy 

If you are insurable, the leverage provided by the life insurance (i.e. the amount of life insurance you can buy per dollar of premium) likely far exceeds the discounted lump sum you would be able to donate to the charity by selling your cash flow to CBC Settlement Funding, or any other settlement purchaser for that matter.  Please note that the size of your ultimate gift depends on the type of policy, your insurability and the structured settlement payment amount. Consider these points:

1. You are using the full value of the structured settlement or annuity, not just the discounted present value.
2. No discounts required if you only have lifetime benefits left. Life insurance premiums are only due until you die. A perfect fit!
3. There is no court approval required.
4. Your private information does not become public information, which it will if you sell your structured settlement (see immediately prior post section  about  "court records"). A life insurance transaction is private.

For more information on  Charitable Life as a charitable giving strategy, information about other ways to use life insurance to enhance settlement planning,  or for your own personal or business life insurance needs, please contact John Darer ChFC MSSC RSP CLTC at 203-561-6560 for a professional consultation. John is licensed for life insurance in 45 states and the District of Columbia (Washington DC) and recently qualified for inclusion in AM Best's Client Recommended Expert Service Providers for 2023.

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John Darer Structured Settlement Expert Settlement Adviser NY|CT|NJ|USA (4structures.com)

Last updated December 22, 2023

 

 

 

Settlement Planning Issues 2013 | "Largest Tax Hikes in the History of the U.S."

by John Darer CLU ChFC MSSC RSP CLTC

The Federal tax increases, or effective tax increases, arriving in 2013 have both settlement planning and financial planning implications and may have a positive effect on the utility of structured settlements, structured attorney fees and other financial solutions involving structured periodic payments.

A. Increase in personal income tax rates

Now             2013

10%              15%

25%              28%

28%              31%

33%              36%

35%              39.6%

Settlement Planning Implications Of 2013 Federal Income Tax Hikes

The increase in taxes increases the taxable equivalent yield of a structured settlement. Structured settlements become more attractive settlement planning option even with low interest rates. Structured settlement payments, if they represent payment of damages for physical injury, physical sickness, wrongful death, or payment of claims for workers compensation are excludable from gross income, subject to the terms IRC 104(a).

Non qualified structured settlements become even more attractive for taxable damages (employment, property, punitive damages, spousal support/alimony on divorce cases,  structured oil and gas lease bonus payments and structured celebrity endorsement fees) as the leverage of tax deferral is increased. Where applicable,  and where underwriting permits, periodic payment reinsurance  becomes more attractive as a solution as a method to pay taxable damages.

Any applicable state and/or local income tax increases will only enhance the value of structured settlements.

Annuitants already receiving structured settlement payments , but having no pressing need to raise cash will have even more of a reason to carefully consider their options before selling structured settlement payment rights. 

 B. Other 2013 Federal Tax Hikes Affecting Families

• Marriage Penalty will return for the first dollar of income
• Child tax credit drops from $1,000 to $500 per child
• Standard deduction is no longer doubles for married couples.

Settlement Planning Implications

Effect on budgeting must be considered.

Taken together with the tax bracket increases, structured settlements become more attractive, particularly on larger cases, structured attorney fees and other non qualified structured settlements. 

C. Federal Estate Tax increase as exemptions expire. 

Current

35% with $5 million exemption ($10 million for married couples)

2013

Top rate is 55% with $1 million exemption

Settlement Planning Implications

• Massive impact on large settlements.
• The $4million reduction in the Federal estate tax exemption brings a larger universe of legal recoveries into the estate taxation zone, with or without structured settlements.
• Need  for greater awareness and use of commutation riders on structured settlements. Premature death during the certain period, and/or with due guaranteed future lump sum payments brings the present value of such structured settlement payments into the estate. Without proper planning, illiquid assets would need to be sold to pay for estate taxes. Estate taxes are due within 9 months of death.
• Increased use of life insurance to " discount" the estate obligation, if plaintiff is insurable. 
• Product arbitrage on attorney fee deferral structured settlements  for attorneys aged 50 plus. If the attorney is insurable at preferred rates, consideration should be given to having little to no certain period on the annuity and provide for the contingency of premature death with life insurance held in trust outside of the attorney's estate. An added bonus is that the attorney may end up with more benefit from the structure while his/her family will receive a lump sum in lieu of remaining payments made periodically at death.  Life insurance proceeds are generally income tax free under current law.
• Increased need for estate planning expertise.

D. Capital Gains Tax hike

Current  15%

2013        23.8%

Financial Planning Implications

Greater opportunities for the use of structured installment sales ("structured sales" ) as an exit strategy for business owners and property owners where there is a high value and low cost basis. Structured sales are an imrovement on an installment sale which puts the financial muscle of a major regulated American life insurance company behind the promise to make the installment payments.

E. Dividends Tax Hike

Current   15%

2013       43.4% (includes 3.8% Obamacare investment surtax)

Settlement Planning Implications

Some alternative investment options to structured settlements are somewhat less competitive than they were before the tax increase.

To be continued... 

 

 

 

NJ Wrongful Death Lawsuit | Element of Damages "Increased Estate Taxes"

by John Darer® CLU ChFC MSSC RSP CLTC

A New Jersey Appellate Court has concluded that an heir's loss of a prospective inheritance resulting from the imposition of increased estate taxes- incurred due to the premature death of a decedent —— is recoverable in a wrongful death action. The Appellate Court reasoned in its May 29, 2012 decision, that because such a tangible, readily calculable diminishment in an heir's expectancy is in the nature of "pecuniary injuries resulting from such death," N.J.S.A. 2A:31-5, it  concludes that it is an element of damages for the jury to consider in this case, subject to appropriate expert evidence.

The interesting legal question arose out of an automobile accident on January 25, 2008 in which John G. Kellogg, 97,  and his wife Barbara Kellogg were passengers in a car owned by Patricia Marks, operated by Russell Marks  which collided with another vehicle owned by Defendant Teresa Cupples and operated by Defendant Trevor R.Hulfish.  On February 7, 2008 John Kellogg succumbed to his physical injuries, which included a displaced rib fracture, non-displaced rib fracture and a possible pulmonary contusion.

Provisions of the Economic Growth and Tax Relief  Reconciliation Act of 2001  ("EGTRRA") reduced estate taxes in 2009 and eliminated them entirely for the year 2010.  Subsequently the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 went into effect December 17, 2010, extending the the estate tax provisions of EGTRRA through 2012.

Plaintiffs sought to recover the estate tax differential from Defendants alleging it was the fault of the Defendants' tortious conduct that resulted in the premature death and ergo, the higher taxes. At the time of his death Kellogg had a life expectancy of 3.20, according to the decision. Though this figure slightly conflicts with life expectancy tables provided by the Social Security Adminstration, the point is the same.  Regardless of whether Kellogg lived 2.44 years or 3.20 years, his heirs would have had a higher inheritance due to lower estate tax liability.

See ROBERT B. BEIM AND FRANKLYN Z. ARONSON, AS CO-EXECUTORS OF THE ESTATE OF JOHN G. KELLOGG AND BARBARA KELLOGG, FRANKLYN Z. ARONSON
AS TRUSTEE OF THE ANNE D. KELLOGG MARITAL TRUST AND JUDITH MEDINA AND PRUDENCE KRAUSE,

Plaintiffs-Appellants,
v.
TREVOR R. HULFISH AND TERESA CUPPLES,

Defendants-Respondents,
and
RUSSELL MARKS, JR., AND PATRICIA H. MARKS,

Defendants,
and
CHUBB INSURANCE COMPANY OF NEW JERSEY,  Defendant/Intervenor-
Respondent

Superior Court of New Jersey

Appellate Division

Docket No. A-5947-10T4

Read a copy of Bem v Hulfish Opinion here

 

 

Settlement Planning: Life Insurance, Liquidity Needs and Estate Planning |NY|CT|NJ|NYC

by John Darer® CLU ChFC MSSC RSP CLTC

Level premium term life insurance which can go out to age 95 is now available at very attractive long term premiums so that older plaintiffs, plaintiff attorneys and others who can't afford, or choose not to pay, higher premiums for whole life or other permanent coverage.

For example a male age 70 might be able to get $500,000 coverage for $8,050 annually, that stays level for 20 years.

Life insurance proceeds are generally income tax free and if the application and ownership is properly structured proceeds when paid may be outside of the insured's estate.

Some possible uses of life insurance at age 65 plus

• Older plaintiffs can solve for post-mortem liquidity needs or bequests without breaking the bank or forgoing coverage due to the burden of whole life cost.
• Older healthy grandparents or parents can provide for a special needs child.
  
• The healthy spouse of a disabled plaintiff can purchase insurance to enhance settlement recovery if he or she were to pass before the disabled spouse.
  
• Equalize inheritances if giving business to one child and have other children who you love, but are not interested in the business.
• Can fund buy sell agreements for law firms. There are options for senior partners who are active as partners and want to continue practicing into their 70s and even 80s
• Enhanced structured attorney fees
• A chance to make up for not buying insurance when you were younger and it was cheaper.

More information on the use of life insurance in the settlement planning process. or watch my podcast

 

"Dangerous Tax Trap in Structured Settlements" Solved...15 Years Ago!

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.