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

Immediate Annuities: "The Ultimate in Predictable Income", Says Investment News

by John Darer CLU ChFC MSSC RSP CLTC

A diverse collection of safe income producing strategies, including immediate annuities, is important for a comfortable retirement

According to "Five Ways To Boost Retirement Income* ", an article byJeff Benjamin at Investment News (a publication which claims to be "the leading news source for financial advisers"):

Establish a Steady and Predictable Income Stream

"...the best way to ensure enough flexibility to move in and out of riskier assets and strategies is to establish a steady and predictable income stream that will enable clients to ride out a stretch of lean years". Investment News September 19, 2010

The 5 strategies addressed in the article are:

• Immediate annuities, which Investment News dubs "the ultimate in predictable income"
• Individual bonds. The article states "Bonds are obviously a critical part of an income portfolio, but in a rising-interest-rate environment — which is likely over the next several years — individual bonds have a distinct advantage over pooled-mutual- fund strategies. As opposed to bond funds, which are never as nimble as a separately managed and customized bond portfolio, the idea here is to shift the emphasis from risk tolerance to income objectives".
• Reverse Mortgages  The article states  "While reverse mortgages are still a long way from being the first choice for most retirement income strategies, they do represent an opportunity that is worth considering. One reason reverse mortgages will continue to gain popularity among retired people is that unlike home equity loans or second mortgages, the loans are not structured based on income or an ability to make payments"
• • Investment News issues this caveat "On the surface, the idea of enabling older homeowners to convert part of their real estate equity into tax-free income while staying in the home seems like a no-brainer. The trouble is, since reverse mortgages started gaining popularity in the late 1990s, many senior citizens have been victimized by shoddy sales practices. A cited quote says "It's still The Wild west out there".  But "as the 70 million members of the baby boom generation hit the qualifying age for a reverse mortgage (62), there is good reason to believe the forces of supply and demand will lead to significant improvements in the way these loans are sold, structured and maintained".
• Convertible Bonds  Investment-grade convertible bonds can introduce some capital appreciation to a portfolio heavy on income-producing intermediate-term bonds.
• Master Limited Partnerships- article discusses how  teh packaging of master limited partnerships into mutual funds, exchange-traded notes and exchange-traded funds is introducing a viable way to hold these higher-yielding investments in qualified retirement accounts with a less complicated tax structure.

What About Structured Settlement Annuities For Injury Victims and Lawyers?

Although the article does not specifically discuss structured settlement annuities, plaintiffs with serious personal physical injuries often face the same issues as retirees because their disabilities, or the loss of a primary bread winner may, in effect, make them "retirees".

Structured settlement annuities provide predictable income. Structured settlement annuities are a solid way to ensure enough flexibility to move in and out of riskier assets and strategies and to establish a steady and predictable income stream that will enable plaintiffs to ride out a stretch of lean years.

A structured settlement annuity is a "souped up" form of income annuity that can also be a deferred annuity and can have multiple payment stream to address multiple needs as to timing and amount. Read What Are Structured Settlement Annuities? Structured Settlement Annuities 2024 (4structures.com)

Investment News' immediate annuity strategy is the "longevity insurance approach",   to write life only annuities that cease payment upon death to maximize yield. They refer to this as " the no-load version, skip the death benefit, just lock in the income"

This is all well and good if you have life insurance to offset loss of principal if you care about the possibility that you could die before the cost of the annuity has been paid out. For healthy and insurable retirees it may be is a superior strategy because this risk can be mitigated with life insurance. It IS possible to find 20 year level premium term insurance through issues ages as old as 70.

For more information about immediate annuities, income annuities or structured settlement annuities or if you need structured settlement quotes now call John Darer at 888-325-8640 

Last updated April 21, 2024

Settlement Planning With The Tax Tsunami on The Horizon

An Investors Business Daily editorial posted on July 21, 2010 sounds the tsunami early warning system over the tax increases that appear on our collective horizon. This posts examines the first wave, and the impact it will have on plaintiffs, lawyers, settlement planners, structured settlement planners, and other settlement industry stakeholders. including sellers seeking an exit strategy from homes or  businesses. Planning considerations and opportunities will be explored in a multi-part series.

A. As of 12:00am January 1, 2010 the estate tax is restored— at 55% on estates of $1 million or more. 

Settlement Planning Considerations/Potential Impact

• Fact finding is going to be more important than ever. Settlement planners and financial planners must tally up assets and have a clear picture of the potential estate tax liability with and without a potential structure. The present value of remaining certain and guaranteed lump sum  structured settlement payments after the payee's death are generally included in and add to his/her estate.
• Structured attorney fee cases need to be planned even more carefully.  Large structure attorney fee cases with remaining guaranteed payments may not only add to the estate but may also be subject to income tax as income with respect to a decedent.
• The use of life insurance in the settlement planning process should move to the forefront. Properly designed life insurance can be used:
• Life insurance can provide a more cost efficient "cash now" scenario for heirs than not having the life insurance and selling the guaranteed payments in the secondary market.
• If the heirs want an annuity they can take the income tax free life insurance proceeds and purchase an annuity at prevailing rates or purchase structured settlement payment rights in the secondary market as an investor.
• If insurable, attorneys older than 45 may want to employ a life only structured attorney fee strategy while paired with a life insurance policy held in an irrevocable life insurance trust. The strategy is to maximize income while living but not add to the estate if dying to soon. The added benefit to the heirs is that they receive an income tax free lump sum (proceeds from life insurance death benefit) instead of having to wait for the taxable annuity payments.

B. Income tax hikes

The lowest bracket for the personal income moves to 15% from 10%. The next lowest bracket — 25% — will rise to 28%, the old 28% bracket will then be 31%. The 33% bracket goes to 36% and the 35% bracket becomes 39.6%.

Settlement Planning considerations/Potential impact

• Increased income taxes improve the intrinsic value of income tax free amounts received with personal injury structured settlements and the tax deferral associated with structured attorney fees, structured employments cases and other structured taxable damage cases.

C. Marriage tax penalty returns

Settlement Planning considerations/Potential impact

• This incrementally increases the amount of  income tax on marrieds which in turn incrementally increases the intrinsic value of a structured settlement.
• The marriage tax penalty is difference between what you pay in taxes as a married couple and what you would pay as two single persons.
• The Congressional Budget Office estimated that in 1996 the average marriage tax penalty was about $1,400 which adversely affected 42% of all married couples. It was believed that some couples chose not to marry because of the tax penalty. The 2003 Jobs and Growth Tax Relief Reconciliation Act of 2003 had reduced the impact of the marriage penalty on married couples who choose to file jointly on their income taxes. This was done by equalizing the standard deduction for singles and married couples and increasing the end point of the 15 percent tax bracket for married couples filing jointly.

D. Capital gains

Jumps 33% — to 20% from 15%.

Tax on Dividends

The tax on dividends will go all the way from 15% to 39.6% — a 164% increase!

Both the cap-gains and dividend taxes will go up further in 2013 as the health care reform adds a 3.8% Medicare levy for individuals making more than $200,000 a year and joint filers making more than $250,000. 

Settlement Planning considerations/ Potential impact

Increase in capital gains tax will make structured installment sale exit strategy more attractive. Structured sales are an improvement on the traditional installment sale. They help sellers of real estate and businesses who have low basis high value assets mitigate capital gains exposure in the year of sale.

The increased tax of dividends on capital gains will become and even more important factor to consider when comparing income tax free structured settlements to alternative investments such as high dividend paying stocks.

E. Halving the child tax credit to $500 from $1,000

Settlement Planning considerations/ Potential impact

Yet another incremental tax increase that will increase the intrinsic value of structures.

F. Fixing the standard deduction for couples at the same level as it is for single filers.

Settlement Planning considerations/ Potential impact

see E.

Americans for Tax Reform lays out other tax hikes designed to pay for ObamaCare such as:

The Medicine Cabinet Tax. "You will no longer be able to use health savings account, flexible spending account, or health reimbursement pretax dollars to purchase nonprescription, over-the-counter medicines (except insulin)."

All the "nickel and diming" adds up!  

MORE TAXES+ GREATER INTRINSIC VALUE FOR NEW AND EXISTING STRUCTURES, even in a low interest rate environment. Check out the taxable equivalent yield chart at 4structures.com and see the how that "puny 3% rate of return",  "ain't to shabby" if you're in the 40% tax bracket.

IRS and DOL Interest in Lifetime Annuity Payments Bode Well For Future of Structured Settlements

by John Darer CLU ChFC CSSC RSP CLTC

The Internal Revenue Service and the Department of Labor’s Employee Benefits Security Administration (EBSA) have published a request for comments regarding lifetime income options for participants in retirement plans.

The development should be of interest to structured settlement and retirement planning stakeholders. The request was published in the February 2 Federal Register.

The IRS and the EBSA are reviewing the ERISA and Internal Revenue Code rules to determine whether and how the agencies could or should enhance the retirement security of participants in employer-sponsored retirement plans and in individual retirement accounts by facilitating access to, and use of, lifetime income or other arrangements designed to provide a lifetime stream of income after retirement (such as annuities)

The purpose of the request for information is to solicit views, suggestions, and comments from plan participants, employers, and other plan sponsors, plan service providers, and members of the financial community, as well as the general public.

Comments must be submitted by the May 3, 2010 deadline to the Office of Regulations and Interpretations, EBSA, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue, N.W., Washington, DC 20210, Attention: Lifetime Income RFI; via e-mail to [email protected]. (you must include RIN 1210-AB33 in the subject line of the message); or via the interactive online portal at http://www.regulations.gov.

Among the issues that the agencies have requested comments:

1.  From the standpoint of plan participants, what are the advantages and disadvantages for participants of receiving some or all of their benefits in the form of lifetime payments?

2. Currently, the vast majority of individuals who have the option of receiving a lump sum distribution or ad hoc periodic payments from their retirement plan or IRA choose to do so and do not select a lifetime income option. What explains the low usage rate of lifetime income arrangements? Are there steps that the agencies could or should take to overcome at least some of the concerns that keep plan participants from requesting or electing lifetime income?

3.  What types of lifetime income are currently available to participants directly from plans, such as payments from trust assets held under a defined benefit plan and annuity payments from insurance contracts held under a defined contribution or defined benefit plan?

4. To what extent are 401(k) and other defined contribution plan sponsors using employer matching contributions or employer nonelective contributions to fund lifetime income? To what extent are participants offered a choice regarding such use of employer contributions, including by default or otherwise?

5. What types of lifetime income or other arrangements designed to provide a stream of income after retirement are available to individuals who have already received distributions from their plans, such as IRA products, and how are such arrangements being structured (fixed, inflation-adjusted, or other variable, immediate, or deferred, etc.)?

6. What product features have a significant impact on the cost of providing lifetime income or other arrangements designed to provide a stream of income after retirement, such as features that provide participants with the option of lifetime payments, while retaining the flexibility to accelerate distributions if needed?

7. What are the advantages and disadvantages for participants of selecting lifetime income payments through a plan as opposed to outside a plan (e.g., after a distribution or rollover)?

8.  How should participants determine what portion (if any) of their account balance to annuitize? Should that portion be based on basic or necessary expenses in retirement?

9. Should some form of lifetime income distribution option be required for defined contribution plans (in addition to money purchase pension plans)? If so, should that option be the default distribution option, and should it apply to the entire account balance? To what extent would such a requirement encourage or discourage plan sponsorship?

10. What are the advantages and disadvantages of approaches that combine annuities with other products (reverse mortgages, long term care insurance), and how prevalent are these combined products in the marketplace?

It is clear that the government is interested in annuities, LIFETIME INCOME ANNUITIES, as a means to provide lifetime financial security.