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

Structured Settlement Established for Kentucky Schoolgirl Dragged by School Bus

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Structured Settlements For Minors News

In 2015, Aly Rednour suffered serious injuries when her knapsack got caught in the closing door of a Jefferson County Public Schools bus and the bus took off, dragging her nearly 1,000 feet. Rednour, a special needs child, suffered “disfiguring” scarring and nerve damage from the incident.

Travelers Indemnity Company, an insurer for Jefferson County (Kentucky) Public Schools agreed to pay the family of Ally Rednour nearly $5 million, according to the settlement agreement [ Source: Louisville's WDRB News March 9, 2022 including a video of the incident and an interview with the James "Bo" Bolus, the Louisville KY personal injury lawyer who represented the family.  The case settled last year, but was published in 2022.

More than $2.7 million of the settlement was paid in an up-front lump sum to Aly's family and their attorneys, according to the settlement agreement says the report. The rest will be structured and split funded, with $793,792

Structured settlements

going to MetLife Assignment Company, Inc.to fund a structured settlement annuity with Metropolitan Tower Life Insurance Company which will finance a trust fund through March 20, 2038, and $1.3 million will be paid to BHG Structured Settlements, which will purchase an annuity from Berkshire Hathaway Life Insurance Company of Nebraska (BNLN), to continue funding the trust from April 1, 2038, until March 20, 2088 according to the report.

Structured settlement annuities are excellent settlement planning tools to provide cash flow certainty where there is a need for certainty. 

Read more about Structured Settlements for Minors and Young Adults

 

 

Are Structured Settlement Receivables Viable in Domestic Non Qualified Assignments?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Could structured settlement receivables (factored structured settlement payment streams) be useful settlement planning tools in certain types of cases if there is regulation of both product and distribution, the transactional risks can be minimized/eliminated and are fully understood by buyers and certain settlement planners and other merchants stop misrepresenting them as annuities?

It is not necessary to go offshore for a non qualified assignment

Factored structured settlement payment streams are not annuities according to the National Association of Insurance Commissioners (NAIC)

NAIC's members regulate the sale of annuities and insurance products. The NAIC's Statutory Issue Paper 160 dismisses the notion that acquired structured settlement payment rights are annuities or insurance products.

Offshore Non Qualified Assignment Companies Were The Norm

For many years the fulcrum for non qualified assignments was an offshore assignment company. Offshore assignment companies filled a void where the type of damages that the future payment obligations represent did not fall within the IRC 130 exclusion which applied to qualified assignment.  Initially such assignment companies were established in Barbados, to support the needs of clients of appointed agents of Liberty Life Assurance Company of Boston (now Lincoln Life Assurance Company of Boston) Allstate Life Insurance Company, Prudential Insurance Company of America and briefly, American General, in Bermuda. Various independent assignment companies followed, mostly in Barbados and one in the Republic of Ireland. There are a number of solutions that are only available using an offshore assignment company.

Domestic Non Qualified Assignment Companies

MetLife introduced a domestic non qualified assignment program as an excellent option for settlements comprised in whole or in part with taxable damages, settlements that otherwise to do not qualify for IRC 130 (such as wrongful imprisonment), or for structured installment sales. Payments must begin  within a year. The design for the funding asset, an immediate annuity issued by Metropolitan Tower Life Insurance Company, requires compliance with IRC 72(u).  IRC 72(u) is also known as the "non natural person rule" 

Treatment of annuity contracts not held by natural persons

(1)In general, If any annuity contract is held by a person who is not a natural person—

(A) such contract shall not be treated as an annuity contract for purposes of this subtitle (other than subchapter L), and

(B) the income on the contract for any taxable year of the policyholder shall be treated as ordinary income received or accrued by the owner during such taxable year.

For purposes of this paragraph, holding by a trust or other entity as an agent for a natural person shall not be taken into account.

 

(3) Exceptions  This subsection shall not apply to any annuity contract which—

(A) is acquired by the estate of a decedent by reason of the death of the decedent,

(B) is held under a plan described in Section 401(a) or 403(a), under a program described in section 403(b), or under an individual retirement plan,

(C) is a qualified funding asset (as defined in section 130(d), but without regard to whether there is a qualified assignment),

(D) is purchased by an employer upon the termination of a plan described in section 401(a) or 403(a) and is held by the employer until all amounts under such contract are distributed to the employee for whom such contract was purchased or the employee's beneficiary, or

(E) is an immediate annuity.

 

What is an immediate annuity?

Per IRC 72(u)(4), the term "immediate annuity" means an annuity

(A) which is purchased with a single premium or annuity consideration,

(B) the annuity starting date (as defined in subsection (c)(4)) of which commences no later than 1 year from the date of the purchase of the annuity, and

(C) which provides for a series of substantially equal periodic payments (to be made not less frequently than annually) during the annuity period.

 

Funding Agreement is Not an Annuity Contract

 

In August 2020 American General introduced its Funding Agreement Structured Settlement which can be used with it domestic non qualified assignment company to fund non qualified structured settlements with a deferred start date. How is this possible?

 

The New York State Department of Financial Services provides some excellent resource material that I have excerpted below.

 

Funding Agreement Not An Annuity Contract. Section 3222(a) states that the issuance or delivery of a funding agreement shall not be deemed to be doing a kind of business authorized by §1113 of the Insurance Law or engaging in any business authorized by §1714 of the Insurance Law.

 

1. In 1982, the term “annuity” was defined to mean “all agreements to make periodical payments where the making or continuance of all or some of a series of such payments, or the amount of any such payment, depends on the continuance of human life”, except payments made under the authority of §1113(a)(1) (i.e., optional modes of settlement of life insurance proceeds (a) As such, a funding agreement could provide for periodic payments over a period certain for individuals in structured settlements or in cases where an annuity with life contingencies was not wanted.
2. In 1985, the term “annuity” was amended by adding the phrase “for a period certain or” following “periodical payments” in the definition of annuity. See §1 of Chapter 864 of the Laws of 1985. As such, an agreement to make “periodical payments for a period certain” could now be considered to be an
annuity as defined in §1113(a)(2). (a) The sponsor’s memorandum in support of Chapter 864 of the Laws of 1985 states that the bill would bring New York into conformity with approximately 38 other states that permit period certain contracts to be written for a period of years rather than for a period dependent on the continued life of the annuitant.
3. Funding agreements sold to entities are not annuities because:
(a) Annuitant must be a natural person. There is nothing in the bill jacket of Chapter 864 of the Laws of 1985 to suggest that the change in §1113(a)(2) was intended to broaden the class of purchasers beyond annuitants (i.e., natural persons).
(b) Installment payments at maturity of a guaranteed interest contract does
not make the contract an annuity. There is nothing in the bill jacket of Chapter 864 of the Laws of 1985 to suggest that the change in §1113(a)(2) was intended to expand the scope of such contracts to include unallocated funding agreements, such as fixed rate, fixed maturity guaranteed interest contracts that provide for installment payments at maturity rather than a lump sum payment. An unallocated guaranteed interest contract is either a funding agreement or a group annuity contract depending on whether the contract provides for or permits the purchase of annuity payments dependent on the continuance of the lives of more than one person. See §4238(a).
4. In addition, a period certain annuity is not a funding agreement because the issuance or delivery of a funding agreement cannot be deemed to be doing a kind of business authorized by §1113.
(a) It has been argued that structured settlements providing for periodic payments to individuals can be considered annuity contracts. However,
because §3222(b)(iv) specifically refers to agreements “ providing for periodic payments in satisfaction of a claim”, we continue to classify such
agreements to be funding agreements for review purposes.
(b) Agreements that provide for lump sum payments at maturity are considered to be funding agreements.

 

The Utility of Factored Structured Settlement Payment Streams

 

The settlement planners who misrepresent factored structured settlement payment streams as annuities are not only misleading their clients, but potentially shooting themselves in the foot. If indeed they were annuities, which they aren't, wouldn't their ownership by a domestic assignment company (a non natural person) possibly violate IRC 72(u)? Factored structured settlement payment streams are often the result of a "slice and dice" of some other person's structured settlement payment streams. Payments are not substantially equal and/or have deferred start dates.   

 

How Not Being an Annuity Presents an Advantage Under Certain Circumstances

 

Given that factored structured settlement payment streams are not annuities, according to the National Association of Insurance Commissioners, under the right circumstance with proper disclosures and acceptance of risk, they may be viable as part of the solution for certain clients. The risks associated with factored structured settlement payment streams include:

• transactional risk  (see ongoing cases Barber case and Keefer v Genex Capital et al. as well as  Alcantara, Wall v Altium investor lawsuit, State of Maryland Attorney General Consumer Protection Division v Access Funding et al. and  Crystal Linton et al v Maryland Consumer Protection Division,   Barry Cooper v Horn, Hamlin et al. FINRA Complaint)
• the possible lack of statutory protections in the event of the insolvency of the issuer of the underlying annuity as set forth in the model act adopted by an increasing number of states.

 

 

    

AIG to Separate AIG Life & Retirement as Part of Restructuring

by John Darer CLU ChFC MSSC CeFT RSP CLTC 

On October 26, 2020 American International Group announced that it would begin the process of separating the AIG Life & Retirement division from AIG with the goal to establish two independent, market-leading companies.

The process is expected to last several years.  If one looks to the blue books of the insurers and old A.M. Best reports one can see that American General has paid billions in dividends to the parent company. If some of that money can now be kept at American General, it has to be a positive that should favorably impact pricing to consumers.

AIG Life & Retirement

Who is AIG Life and Retirement?

AIG Life & Retirement consists of four operating segments: Individual Retirement, Group Retirement, Life Insurance and Institutional Markets. It includes the following major U.S. life insurance companies: American General Life Insurance Company  (established 1926); The Variable Annuity Life Insurance Company  (1955); and The United States Life Insurance Company in the City of New York (1850).

The AIG LIfe & Retirement Group is to be spun off and rebranded as Corebridge Financial  UPDATE

Life insurance and annuities, including structured settlement annuities and funding agreements, are issued by American General Life Insurance Company (AGL), Houston, TX except in New York, where issued by The United States Life Insurance Company in the City of New York (US Life). The latter is the oldest stock life insurance company in the United States and was acquired by American General in 1997. American General was acquired by AIG in 2001. Western National, acquired by American General in 1997 and Variable Annuity Life Insurance Company acquired by American General in 1967 were also underwriters of structured settlement annuities in the past.

On May 11, 2001 the Chicago Tribune reported that "the race for scale in U.S. life insurance stepped up Friday, as global insurance giant American International Group reached an agreement to acquire fellow insurer American General Corp. for about $23 billion in stock". The deal was reported by the Chicago Tribune as "the largest ever in insurance" and "would create the largest U.S. insurer by far, and sends a signal to all other U.S. life insurers and annuity sellers that they have to get much bigger to compete.

Recent Innovation by American General

American General has recently introduced a number of periodic payment innovations to the structured settlement market

• Interest Rate Linked Structured Settlements  (IRLSS).  Here American General creates an opportunity to get into a structured settlement now, but create certainty in the form of add on future income streams at then prevailing rates if they higher than a certain benchmark on a future measuring date(s).
• Non Qualified Assignment Facility with Domestic Assignment Company and Ability to Defer Here a fabulous opportunity to create customized and predictable stream(s) of future payments using a Funding Agreement issued by American General, or United States Life in the City of New York (for New York cases). An option to defer without having to go offshore.

These structured settlement and settlement planning products are only available through licensed insurance agents appointed through the structured settlement distribution channel of the underwriting companies.

Beware Structured Settlement Secondary Market Cacodemons

It's Halloween all year round for the hellhounds and vultures of the structured settlements secondary market. They want your structured settlement candy. The incorrigible fiends drool for your large financial candy bars at bite size prices. Naturally when such an announcement is made, you can expect fake news and speculation from those looking to induce gullible people into to a pennies on the dollar financial blood letting.  One company, whose founder Robert Shapiro is now in jail on a 25 year stint, deliberately targeted structured settlement annuitants of AIG subsidiaries during the 2008 financial crisis. Annuitants that stayed the course received their payments. Those that sold to factoring companies lost money

 

 

 

Settlement Agreement Language to Protect Annuitants From Structured Settlement Protection Act Abuse

by Structured Settlement Watchdog

Connecticut attorney Edward Stone who has provided legal advocacy for structured settlement annuitants who have been victims of structured settlement factoring companies, suggests some language that he says should be inserted in settlement documents to better protect structured settlement annuitants.

Help avoid bad secondary market outcomes. Consider this protection clause for structured settlement agreements

"You do this by stating, ‘Neither the beneficiary of this structured settlement nor any other assignee shall have the power to assign the periodic payments to any third party without a genuine hardship and even then only with the advice of counsel.  Any purported assignment in violation of this provision shall be void ab initio. This provision has been inserted at the insistence of plaintiff’s counsel to protect the periodic payments described in the structured settlement agreement from dissipation.”

Stone, who is a supporter of structured settlements and says "Structured settlements are an excellent way to ensure long-term financial stability. But there are bad apples in every industry. Accident victims and their attorneys must protect themselves".

Eddie Stone is quoted from an article by H. Dennis Beaver, Esq, an attorney from Bakersfield California published by Kiplingers painting a dire picture of the bad apples of the structured settlement secondary market.

"We have all seen television, radio or internet ads which urge cashing in structured settlements.  There are times when it makes sense to sell a small part of the structured settlement payment stream, but what I find so cruel are companies that buy every last dollar from someone with serious injuries, very poor judgment, and little or no financial experience who then winds up as a ward of the state.

"Families need to always keep in mind that the structured settlement was created to provide a stream of tax-free payments over many years to help the injury victim live as normal a life as possible. It was not intended to help someone with no business experience, who has had serious injuries and possible mental impairment, put that secure tax-free income stream at risk in a business venture.”

Settlement Planners, Who Led the Charge For the "Right to Factor" in Settlement Documents Should Adjust Their Focus

In my opinion, settlement planners, led by failed AIG antagonist Richard B. Risk, Jr. who led the charge in 2003, to add "IRC 5891 enabling language" to somehow protect an annuitant's right to factor (and reduce malpractice exposure to plaintiff attorneys, to the point where it is now standard language in settlement documents and qualified assignments),  must now shift the focus to better advise and protect their clients in light of a reality of massive rip offs. Some have recommended that annuities be paid into trusts to accomplish the protection. 

Here's an excerpt from how Risk stated his case in an SSP QuickTopic communication from March 3, 2003 (extracted from the Internet in 2005)

"10/09/2005

Dick Risk 03-03-2003 07:46 PM ET (US)
SSP Press Release 2 - QuickTopic Document Review Page 5 of 10
http://www.quicktopic.com/19/D/dytdpCAFxHckn?inline=1 10/9/2005
1. Notifying claimants of their structured settlement rights;
14
2. Complying with all federal and state laws impacting structured settlement claimants;
15
3. Supporting the public policy behind structured settlements.
16
This would include, as a minimum:
1) Every assignment company has a duty to inform every payee of new rights under section 5891. (I suspect
many of the assignees take the position that there were no new rights granted if the contract prohibits the sale
of future payments.)
2) Acknowledging the rights granted by 5891 in the settlement agreement and in the "uniform" QA documents".

"Protect Them By having Structured Settlement Paid Into a Trust"?

While structured settlements into trusts might be a viable solution depending on the circumstances, it might add significant costs depending on the trust company that may render the solution unreasonable.

California Attorney Notification Rule

Stone's suggestion is of the same mind as the California law which requires that the plaintiff lawyer of record be notified of any attempt to sell structured settlement payment rights within 5 years of the establishment of a structured settlement.

Investor Benefits

Too many naive and unsophisticated people waive their rights to independent professional advice sometimes through the encouragement of unethical and what may sometimes be illegal activities of structured settlement factoring origination firms and their representatives. Factoring representative grooming such structured settlement annuitants for financial rape and inducing them to commit fraud about where they live is unfortunately more common than a few isolated incidents. This potentially puts investor money in jeopardy. Acquisition of structured settlement payment rights might be a bit safer if Stone's suggestion is implemented at the time a structured settlement is established.

 

Structured Settlement Instead of a Health Savings Account?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

It has been suggested that using a structured settlement annuity is an alternative to Health Savings Account. While I respect the author of the suggestion, in my opinion such assertion cannot be applied categorically and each situation should be looked at indepedently. This blog explores the question below.

Health Savings Account (HSA)

What is a Health Saving Account (HSA)?

A Health Savings Account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan (HDHP). A high deductible health plan requires a minimum deductible of $1,500 ($3,000 family) and maximum out of pocket limit of $7,500 ($15,000 family).

• Contributions are tax deductible
• Withdrawals from the HSA to pay qualified medical expenses are income tax-free.
• If you claim a family member on your taxes, you can use your HSA money for their qualified medical expenses – even if you just have single coverage. 
• Interest grows tax-free
• Unused funds roll over annually if not used
• Contributions to an HSA reduce your Modified Adjusted Gross Income, which determines eligibility of subsidy under the Affordable Care Act  (ACA)
• HSA accounts are liquid and portable.

Is a structured settlement a viable alternative to an HSA in 2023?

• An allocation of damages from a settlement involving personal physical injury settlement proceeds used to fund a structured settlement annuity also grows income tax-free. In contrast to an HSA, claimants can use structured settlement annuity payments for medical and non-medical costs.
• Structured settlement annuities, while fixed, do not have any usage stipulations. The injured claimant can use the payments to cover out-of-pocket medical costs, or any range of other expenses, from daily living expenses to longer-term costs, like college tuition or retirement.
• No ongoing fees
• Structured settlement annuities have no contribution limits, so injured claimants have complete control over the amount they want to contribute to the annuity.... HOWEVER
• Money cannot be withdrawn from a structured settlement annuity like it can with an HSA. If there is a timing mismatch, the only way to get liquidity is a confiscatory sale of structured settlement payment rights via a structured settlement factoring transaction for pennies on the dollar. The liquidity from a structured settlement is such cases may take 90 days and is subject to a judge's approval. Being dinged for a monthly fee from an HSA bank account is far less than the structured settlement factoring "penalty"
• That being said, research shows that the best HSA accounts offer low fees, easy access, and excellent investment options. For example

Lively HSA

The monthly cost to own a Lively HSA is $0. Account opening fee; $0. Account closing fee; $0. Debit card fee (up to 3 cards per account); $0. 

The account is also FDIC insured and it currently yields the following interest rate (varies depending on balance size):

Less than $2,500       0.25% APY
$2,500 – $4,999         0.35% APY
$5,000 – $14,999       0.45% APY
$15,000+                  0.60% APY

And if you’re an investor, all accounts are attached to the TD Ameritrade platform. And as luck would have it, TD Ameritrade recently changed their fee structure, and all stock trades now cost $0.00.   Source: DoughRoller.Net

What are the HSA Contribution Limits for 2024?

The HSA contribution limits for 2024 are $4,150 for individuals and $8,300 for families. The catch-up contribution limit for those over age 55 is an additional at $1,000.

If both spouses are 55 or older and not enrolled in Medicare, each spouse’s contribution limit is increased by the additional contribution. Each spouse must make the additional contribution to his or her own HSA.

Each situation must be looked at on its own merit.   Given a 360 degree look, structured settlements and HSAs are complemenary financial tools that can be used to serve a client's needs.   

Last updated January 12, 2024

 

 

 

Workers Compensation Structured Settlements | Qualified Assignments On or AFTER August 5, 1997 Filings?

by John Darer® CLU ChFC MSSC CeFT RSP CLTC

Workers Compensation Qualified Assignments for Structured Settlements

Qualified assignment only became available for workers compensation cases filed AFTER August 5, 1997.

The Taxpayer Relief Act of 1997 amended the Internal Revenue Code, adding workers’ compensation payments under IRC § 104(a)(1) to the language of IRC §130, making them eligible for qualified assignment the same as physical injury or physical sickness tort claim payments under IRC § 104(a)(2), but applicable to claims under workmen’s compensation acts filed after the date of the enactment of the Taxpayer Relief Act (August 5, 1997).

On or prior to August 5, 1997, workers compensation parties could only make limited use of structured settlements where the future periodic payment liabilities were assigned (at the Safeco Life's SAFECO National facility) or through reinsurance, where the employer was insured.

 

 

Structured Settlement Industry Production Soars Above $6B | 2018 Was Highest in a Decade

by John Darer CLU ChFC MSSC CEFT RSP CLTC

By all accounts, 2018 was the best production year for the structured settlement industry primary market for a decade.  Here are the highlights:

• Total premium $6,019,384,091.  That was an increase of 8.45% over 2017.
• Three insurers received in excess of $1B in premiums
• Prudential did just under $1B, tripling 2017 production.
• USAA more than doubled its 2017 production.
• Leading underwriter Berkshire Hathaway, which had a dip in 2017, returned to its customary level.
• The number of cases structured increased by 4.27%, the best since 2013 and the second best increase in the last decade.

Numbers are even more impressive given  the few hurdles straddled in 2018

• These results are quite a statement given that a major player in the non qualified structured settlement market Liberty Life Assurance Company of Boston ceased writing in February 2018. Liberty represented more than $522M in premiums in 2017.
• Metropolitan Tower Life Insurance Company, which began offering a non qualified structured settlement solution in January picked up some of the slack. More good news to come later this year when Met rolls out a structured installment sale funding  solution.
• The "agita" over Berkshire Hathaway's good faith attempt to look after consumers with its Hardship Exchange Program turned out to be a tempest in a teapot.
• The AIG Structured Settlement Class Action, which was dismissed with prejudice in September 2018 was a complete non factor despite the best efforts of a few would be "saboteurs" from within the industry and without. While the plaintiffs have appealed, the plaintiffs appeal is as unimpressive as original complaint and the amended complaint.  

If any year proved the value of structured settlements it was 2018. The stock market achieved a schizoid level of volatility. Such times makes people appreciate the advantage of "going with the flow". The structured settlement flow.

 

Qualified Settlement Fund | "A Tax Free Way Station" for Attorney Fees?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

What is a Qualified Settlement Fund?

A Qualified Settlement Fund is a fund, account or trust authorized by Treasury Regulation 1.468B-1(c). Under the regulation, each QSF must:

1. Be established pursuant to an order of, or is approved by, the United States, any state (including the District of Columbia), territory, possession, or political subdivision thereof, or any agency or instrumentality (including a court of law) of any of the foregoing and is subject to the continuing jurisdiction of that governmental authority;
   
2. It is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability; and
3. The fund, account, or trust is a trust under applicable state law, or its assets are otherwise segregated from other assets of the transferor (and related persons).

A Tax-Free Way Station?

It has been said that "A qualified settlement funds are a great tool in litigation to 'park' money or create a tax free way station", which conjures up that at least quarter of a century old dilemma once pondered by 1990s slackers Wayne and Garth.  [Jeopardy question for readers born after 1985, "What is Wayne's World?"]  #mikemyersbeforeaustinpowers

According to Chris Lordan CPA, whose Minnesota firm administers qualified settlement funds,  "an independent, qualified trustee, often an accountant or a lawyer, is appointed to handle the trust. The trustee manages the funds, handles ongoing claim resolution, and works with the plaintiffs to determine the trust’s payout structure.The trustee also assures strict compliance with 468B and other regulations: without constant and careful oversight, the benefits of the qualified settlement fund may not be fully realized or even disallowed".

If it's a trust under state law, wouldn't any income and gains generated  by the investment of the assets in the trust be subject to tax on a state or federal level? Even money markets aren't paying zero these days.

As of October 31, 2018

CIBC Bank USA 2.16% APY

HSBC  2.01% APY

Goldman Sachs Marcus 2.05%

Source:  Bestrates.com

One of the duties of a QSF administrator is to file tax returns for the QSF. For a New York QSF, this might include a Federal return, as well as fiduciary tax forms for New York state and other applicable taxing authorities.

So it seems a bit far fetched to call a qualified settlement fund "a tax free way station", in my opinion.  But that's just me. How about § 1.468B-2 Taxation of qualified settlement funds and related administrative requirements?  No way?  Way.

 

What Happens to An Annuity When You Die?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

What Happens to an Annuity When You Die?

If the annuity is a retirement annuity, the policy is in accumulation phase  (payouts have not begun at the time of death) AND the owner has named beneficiaries, the value of the annuity on the date of death is paid to the primary beneficiary. An advantage of naming a beneficiary is that the funds are available much faster to the beneficiary than they would be having to go through probate. Some companies give options for extending the deferral of interest. Required minimum distributions may be necessary where the decedent was over 70 1/2 at the time of death.

If the annuity is a payout annuity, such as a deferred income annuity (DIA) single premium income annuity (SPIA) or structured settlement annuity (SSA), AND the annuitant has named a beneficiary, only periodic payments that are certain are paid to beneficiaries, when they are due.

If the annuity is structured settlement annuity (SSA) with a commutation rider that has been in place since the annuity was established, AND the annuitant has named a beneficiary, remaining certain payment are commuted to a lump sum using the formula stated in the contract and paid to the designated beneficiary.  In some cases the designated beneficiary may be a trust.

Why Not Naming a Beneficiary to Your Annuity, or Leaving It To Your Estate is a Bad Idea.

If there is no named beneficiary, payments are made to the Estate of the deceased annuitant payee. The value of the annuity on the date of death to must go through the probate estate and will be hit with any fee or charge that is based on the assets of the Estate.

Do you need to name an annuity beneficiary in your will?

No, you do not need to name an annuity beneficiary in your will because all it will do is delay the payment of proceeds while the Estate of the decedent is probated. Naming a beneficiary with the annuity issuer results in much faster and less costly distributions following the death of the annuitant payee.

When this post was first published, Elaine Silverstrini, a writer for the unreliable website Annuity (dot)org, lead generation company for CBC Settlement Funding, clearly did not have a handle on this. She wrote:

"After the death of an annuity owner, annuities can be left to a beneficiary selected by the owner. This means an annuity held by a parent, spouse or another loved can be willed to a person named as a beneficiary".

Ah...no. Not a good idea for the reasons stated above.

Name a beneficiary using the form supplied by the annuty issuer, submit and confirm

You can also name a primary beneficiary and a contingent beneficiary in case the primary beneficiary is not living at the time of your death.  With a payout annuity, such as a structured settlement, the beneficiary can name their own beneficiary once they begin receiving payments. Submit any changes on the form provided by the annuity issuer and don't forget to confirm receipt and that changes are properly recorded. Usually a letter goes out to confirm, but you should take practive steps yourself anyway.

Last updated August 5, 2023

 

Minors Personal Injury Settlements | The Negative Consequences of CDs v Structured Settlements

by John Darer CLU ChFC MSSC CeFT RSP CLTC

If You Bank It, Don't Bank on Maximum Financial Aid

Structured Settlements Avoid the Kiddie Tax and Can Be Designed To Minimize Impact on Financial Aid

Parents or guardians of minors who are receiving a settlement in a personal injury or wrongful death case, should give due consideration to how the settlement will impact the ability to receive financial aid for college.  Having a lot of money in a bank account, or in a CD coming due at age 18, could reduce or even eliminate, the possibility of receiving needs based financial aid.  Depending on the school, the FAFSA (for federal student aid) or CSS Profile (for institution based student financial aid) may be used. Each of those forms requires a significant percentage of student assets be used in its calculation of Expected Family Contributions (EFCs). At present that is 20% for FAFSA and 25% for the CSS Profile. 

Structured Settlement Annuity is Not an Asset of Minor

A structured settlement annuity is not an asset of the minor. The structured settlement annuity is owned by a qualified assignment company in most cases. In rare instances it is owned by the Defendant or Defendant's insurer. The minor only has the right to receive payments when due and would have had no control over the establishment of the structured settlement. Furthermore, in accordance with terms of the structured settlement and in compliance with tax code, the periodic payments cannot be accelerated, deferred, increased, or decreased, by the recipient of such payments".  [ see IRC 130(c)(2)(B)]

Tax Difference Between Structured Settlements and CDs

Damages for personal injury or wrongful death are income tax free,  subject to IRC 104(a)(2). While a lump sum from a personal injury or wrongful death settlement would be income tax free,  the interest on a lump sum invested in bank CDs would be taxable. So, for example if you have a 12 year old son and invest in a 5 year CD with Barclay's at time of posting, it would earn 2.75%. The 2.75% would effectively be reduced by the tax on the interest, which could be inflated if there is a kiddie tax  [ See below and  Taxable Equivalent Yield | What is The Value of the Structured Settlement Tax Benefit?]

Kiddie Tax Impact

The interest on a minor's personal injury or wrongful death settlement could be taxed at a high rates if invested in CDs, or other taxable investments. The Kiddie Tax is applied to the amount of the child's unearned income that exceeds $2,100. The Kiddie Tax rate is parent's or parents' marginal tax rate (the highest rate applied to the last dollar earned) which could be as high as 37%, for the 2018 tax year.  [ see IRS Topic 553  Tax on a Child's Investment and Other Unearned Income (Kiddie Tax)]

Notwithstanding the above, there is substantial risk of wasteful dissipation in making a large sum of cash available at age 18. A teenager or young adult could benefit from wealth orientation by speaking to a Certified Financial Transitionist.

Read more about Structured Settlements for Minors