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
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...
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