by John Darer CLU ChFC MSSC CeFT RSP CLTC
The Estate Tax Cuts under the Tax Cut and Jobs Act are set to expire on December 31, 2025. Unless renewed, exclusion rates on the Federal level are set to go back to preceding levels indexed for inflation.
Berkshire Hathaway Life Insurance Company of Nebraska is a structured settlement annuity issuer with a responsive Second Generation structured settlement commutation rider. See my April 4, 2022 blog post on 4structures' Settlement News Network Blog Estate Cannot Commute Structured Settlement to Lump Sum IF... (4structures.com)
Second Generation Structured Settlement Commutation Riders
A Responsive Structured Settlement Commutation Rider helps maintain the benefits of structured settlement payments for survivors by assuring that only the amount necessary to pay the shortfall in the obligation to pay off liens (with an SNT), and/or tax liability (as the case may be) is used giving a reasonable chance that the obligations can be satisfied without compromising the integrity of the structured settlement benefits for surviving spouses, children or other beneficiaries.
Why Were First Generation Structured Settlement Commutation Riders Created?
First generation commutaton riders were created to solve a need for estate liquidity to pay taxes where there was none and when the Federal Estate Tax exemption was only $600,000. Life insurance was and still is an efficient potential solution to provide liquidity at a Payee's death. Obtaining such life insurance was (and still is) an option for the insurable but not for those with the most serious injuries or medical conditions. Care must be taken when considering the choice of applicant for such insurance (e.g. a trust) to keep the life insurance proceeds out of the estate of the structured settlement payee.
First generation commutation riders require the selection of a commutation percentage up to 100%, calculated based on either the annuity issuers prevailing structured settlement annuity rates, or an objective formula using a discount rate based on a published index. The commutation precentage has to be in the Settlement Agreement and the applicable Qualified Assignment Agreement in accordance with the procedures established by the annuity issuer and its qualified assignment company.
Expansion in Use of Structured Settlement Commutation Riders to Claimants With Special Needs
After First Generation Commutation Riders expanded in application to settlements of plaintiffs with special needs, a new dilemma arose in certain jurisdictions, Forced 100% Commutation, because it would only be speculation as the date of death and the accumulated expenses on the date of death.
There is something patently unfair with the need for a 100% commutation when establishing a long term structured settlement (in certain states and counties in New York for example) when the liquidity it creates may end up being far in excess of what is actually needed to pay off a lien. This means that survivors lose the income tax-free benefits of a structured settlement because it will be 100% commuted to a discounted lump sum at the death of the decedent.
Berkshire Hathaway Responsive Commutation Rider/ Second Generation Commutation Rider (Cont.)
Berkshire Hathaway has a thoughtful solution that covers contingencies, (1) there are insufficient monies in the special needs trust to satisfy Medicaid liens (2) there are sufficient monies in the special needs trust to satisfy Medicaid obligations and is available in states that are members of the Interstate Insurance Compact.The Insurance Compact established a multi-state public entity, the Interstate Insurance Product Regulation Commission, which serves as an instrumentality of the Member States. The Compact serves as a central point of electronic filing for certain insurance products, including life insurance, annuities, disability income, and long-term care insurance that are reviewed for compliance pursuant to comprehensive and detailed uniform product standards developed and adopted by Member States as their product content requirements, affording a high level of protection to purchasers of asset protection insurance products.
USAA Life Insurance Company has a Liquidity Solution at the Death of the Payee based on an Objective Formula.
An advantage of USAA's solution is there is no need to speculate on a percentage commutation. Please note that USAA Life Insurance Company structured settlement annuities are not available in the State of New York.
Every Single Premium Immediate Annuity issued by USAA Life Insurance Company for use as a funding asset for structured settlement assignment (a “Structured Settlement Annuity”) contains a “Death Benefit Paid as a Lump Sum” provision (the “Commutation Provision”).
The USAA Life Structured Settlement Commutation Provision provides:
"If the Owner requests the Death Benefit be paid as a lump sum, we will pay the lump sum to the Beneficiary, and the Contract will terminate. The lump sum is determined by discounting the remaining guaranteed Benefits. USAA will use use a discount rate 1% higher than the rate used to determine your original Benefits. This 1% increase means that the lump sum will be less than the remaining guaranteed Benefits.
USAA Annuity Services Corporation, as the Owner, will standardly provide a commuted value offer in the processing of a death claim. The offer is a one-time, all-or-nothing offer for each beneficiary – no partial commutation can be provided. However, a commutation offer will not be provided if the Company (1) receives written instructions to the contrary from the settling parties prior to annuity issuance or if
commutation is prohibited by court order, and (2) an appropriate endorsement is obtained before policy issuance.
The commuted lump sum is calculated using the contract interest rate plus 100 basis points (i.e., 1%). For instance, if the contract interest rate is 4%, the commutation rate is 5%. The commutation rate is thus established at contract issuance and is not market dependent".
There is a Need for Responsive Commutation Riders to become the Common Practice
In 1995 there were no commutation riders. Before the turn of The Millennium there was an Allstate Private Letter Ruling and other companies followed. A cessation of liability rider is another clause in a structured settlement that ends the obligation of the insurer under certain circumstances.
Opportunity For Structured Settelment Factoring Industry If Primary Market Cannot Get It Together
Last updated January 16, 2024