Structured Settlements 4Real® Blog: Structured Settlements | Settlement Planning News and Commentary

Structured Settlement Annuities Are Not Tax-Free Insurance Contracts | Wait! What?

by Structured Settlement Watchdog

You may encounter the term "tax-free structured settlement annuity" on the Internet. Be mindful that there is no such thing. Don't worry annuitants, there is an exemption, but not exactly the way it's being presented in many cases by competent settlement practitioners and reputable settlement companies that should know better.

Examples:

• One settlement planner's website says "Structured settlement annuities are not taxable — they're completely tax-exempt"
• Another settlement planner's website says "Tax-free Income: 100% of structured settlement annuity is tax-free – including the settlement award, principal, ongoing payments and interest earned".
• "a tax-free structured settlement annuity to meet medical and living expenses, or other financial planning tactics".
• "A tax-free structured settlement annuity qualifies for special tax treatment under IRC §§104(a)(2) and 130(c)"
• "A claimant cannot accept a cash settlement and then purchase an income tax-free structured settlement annuity on his/her own"
• The best time to start preparing for your financial future is right now. Consider the many advantages of a Tax-Free Structured Settlement Annuity.*"
• " I work with the Tax Free Structured Settlement Annuity Product and Various Trust products"
  

While some of these statements may seem plausible, the nature of damages that the payments represent is a critical factor, not the annuity contract itself. 

Think about the applicable tax code sections cited in every settlement agreement that involves a structure.  The word "annuity" does not appear in IRC Sections 104(a)(2) or IRC 130(c). Furthermore, a structured settlement annuity is a versatile insurance contract that can be used for a variety of applications, including structured settlements being used as a funding vehicle for settlements involving periodic payment of taxable damages and structured installment sales. 

I encourage my industry colleagues to take greater responsibility, hopefully with the recognition that inaccurate statements end up getting parroted or cited by others.

See my comprehensive write up "What is a " Tax Free Structured Settlement Annuity?" on the Settlement News Network

 

NJ Personal Injury Attorney's "Negative Aspects of Structured Settlements" Falls Short

by Structured Settlement Watchdog

A Fort Lee New Jersey personal injury law firm asks, " What Are the Negative Aspects of a Structured Settlement?" Its response to its own question falls a bit short. 

Here is my response to the Fort Lee personal injury firm's 3 purported claims

What Are the Negative Aspects of a Structured Settlement?

1. These settlements may have some exceptions of the tax rule, meaning that punitive damages and some attorney’s fees may be taxed.

Response

Punitive damages are not a negative aspect of structured settlements.  Punitive damages are not a negative aspect of settlements if you're the plaintiff. Attorney fees are not a negative aspect of structured settlements. Attorney fees are payable whether or not there is a structured settlement.

A structured settlement is defined under the Internal Revenue Code. Where payments represent damages on account of physical injury or physical sickness, wrongful death, wrongful incarceration, claims for workers compensation the plaintiff/claimant receives payments income tax free.  [ See IRC Sections 104(a)(1), 104(a)(2), 130, 139F] Read about the Tax Benefits of Structured Settlements

Claims for taxable damages such as punitive damages, interest on judgment and so on, may benefit from a non-qualified structured settlement. These are tax deferred periodic payment solutions.  Where there are taxable damages such as punitive damages or judgment interest, attorney fees on certain taxable damages, a plaintiff attorney ought to engage a settlement planner and consider employing a two-pronged approach, with a Plaintiff Recovery Trust as well as a tax deferred non qualified structured settlement to help mitigate current taxes and maximize the client's net recovery. Read about Plaintiff Recovery Trust

Attorneys may benefit from structured attorney fees or attorney fee deferred compensation. An attorney may defer well in excess of the limits of qualified pension plans. In fact, there are many options for attorneys.  Read about Attorney Fee Deferrals and Structured Attorney Fees and Non-Qualified Assignments

2. Unknown changes in the economy could lead to a sudden, drastic change in payments and a plaintiff may receive less.

Response

If you invest in stocks, you can lose value in a minute. People go into structured settlements for safety and income certainty. Insurers are highly regulated, must maintain reserves that are annually audited in each state in which they do business. 5 companies that currently write structured settlement annuities have been in business since the 19th Century.  Modern index linked structured settlement annuities offer options that provide upside potential with downside protection.

The 2012 Executive Life of New York liquidation was an instance where there was a reduction in benefits. It was far from sudden. It was well known in the mid 1980s that ELNY priced very aggressively and that its qualified assignment company had at one time 40% of its assets in junk bonds. I've studied and written about it extensively.  See for example, Lessons to be Learned from Eric Yerkes v Cessna and Yerkes v Anapol Weiss

3. Insurance companies are sometimes reluctant to disclose how much they would have to pay to buy an annuity to cover the settlement, which means that an attorney can’t make a complete assessment of the benefits of the offer.

Response

All the more reason for plaintiff lawyers to work with a settlement planner. It's so easy to find out the cost. This talking point is nearly 40-year-old relic of a time of the "urban legend" that knowledge of the cost of a structured settlement would trigger a taxable event.  For a comprehensive write up, please see my February 5, 2010 blog Disclosure of Structured Annuity Cost by Defendant Is Not Constructive Receipt - Structured Settlements 4Real® Blog: Structured Settlements | Settlement Planning News and Commentary (typepad.com)

There is more to settlement planning than a structured settlement. A plaintiff attorney should be engaging a settlement planner to (at the very least) price out the cost of the plaintiff's needs.  Advocate from a position of knowledge. Avoid reacting from a position of the unknown. What is Settlement Planning?

 

Are Structured Settlement Annuities Taxable?

by John Darer CLU ChFC MSSC CefT RSP CLTC

“Is a structured settlement annuity taxable? And is the initial amount that I get from the settlement taxable?”, asks a settlement planning firm.

Here is their response:

"If the origin of the claim is based on a personal physical injury, Section 104[a][2] of the Internal Revenue Code states that the initial principal amount on the settlement that the client receives is not taxable. It is tax-exempt at the state, local, and federal levels. however, if the client decides to invest their settlement funds, then the interest that grows from the investment is taxable. One way to avoid this is to establish a structured settlement annuity for the client to receive their settlement funds. All of the interests (sic) that grow inside of the structured annuity will also be tax-exempt. Payments received from a structured settlement annuity do not need to be reported on any tax return form (1040) or any tax document. Both the principal amount and interests (sic) in the annuity are completely tax exempt".

Here's the thing...

1. The Internal Revenue Code is Federal tax code. While there may be state and local tax laws that are modeled after federal tax law, those are the dominion of the individual states or local governments and their respective departments of revenue. 
2. IRC Section 104 (a)(2) permits a taxpayer to exclude from gross income "the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or physical sickness" Source: Internal Revenue Service irs.gov
3. The key take away is that it is the damages that are tax exempt. With a properly established structured settlement, that starts with an obligation to make future periodic payments as damages on account of personal physical injury, where the obligation is generally assigned by way of a qualified assignment, and then funded with a structured settlement annuity or structured settlement annuities as a qualified funding asset, each of the future payments is tax exempt.

 

Do Structured Settlement Payments Get Inherited Through Your Will, or Do You Name a Beneficiary?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Once again, I'm scratching my head at the output of the settlement purchasing company that is currently believed to be the only member of the National

Name, Confirm, Repeat as Necessary

Association of Settlement Purchasers with a related entity that has agency relationships with structured settlement annuity issuers and brokers structured settlement annuities in the primary market. 

In the process of soliciting people to sell their structured settlement payments the New York company states in a blog:

"A loved one left you their future structured settlement payments in their will, and you’re wondering what you can do with it. Maybe you have a business opportunity, or you are interested in purchasing a house. You might be facing an emergency and looking at your options to cover that sudden expense. So, can you sell this asset? The short answer is yes. If you inherited a structured settlement, that means you now have the rights to it, and to the future payments. And in situations where you have a financial need, you most likely qualify to sell some or all of the future payments from the inheritance for a lump sum in cash" Source: CrowFly website

While it's certainly possible that someone could name a beneficiary of structured settlement payments in their will, it is certainly not the norm and probably not advantageous to do so:

1. Naming a beneficiary with the structured settlement annuity issuer is easy and simple. You fill out a beneficiary designation form and you file it with the insurer, checking to confirm that your wishes have been recorded. Your signature may need to be notarized.
2. You can name and change primary and contingent beneficiaries and their respective shares/percentages at any time, as long as such changes are in writing and in the proper format accepted by the insurance company that issues the structured settlement annuity.
3. Naming a beneficiary with the structured settlement annuity issuer means that the proceeds will begin to flow directly to your beneficiaries without delays and costs associated with probating an estate. It's the matter of completing a claim form and providing a copy of the death certificate. 
4. Death proceeds that pass through the probate estate are subject to executor/executrix fees (if there is a will), administrator/administratrix fees (if there is no will)
5. Death proceeds that pass through the probate are subject to claims of creditors of the Estate. 

Where might you find future structured settlement payments going into an Estate?

• If you fail to name a beneficiary for your structured settlement, or the beneficiary you name is not living at the time of your death, and you have not named a contingent beneficiary, payments will default to your Estate.
• If the payments are going to a trust, such as Special Needs Trust or Supplemental Needs Trust, your structured settlement has a full commutation provision at death and there is an abundance of cash that exceeds the Medicaid payoff, payment will be distributed subject to terms of the trust. 
• A number of structured settlement annuity issuers, including Berkshire Hathaway Life Insurnace Company of Nebraska, First Berkshire Hathaway Life Insurance Company and Independent Life Insurance Company will allow a beneficiary designation that allows a partial commutation based on a notice of shortfall in the trust assets to satisfy amounts owed to Medicaid and/or Estate taxes. The balance would go to named beneficiary or beneficiaries, or the Estate (if no beneficiary has been named, or if a beneficiary has named, but no contingent beneficiary has been named at the time of the annuitant's death).
• If you are selling (or have sold) part of a lump sum structured settlement payment to a settlement purchaser such as CrowFly, and the annuity issuer will not split annuity payments, payments will be subject to a payment servicing arrangement. It's really important that anyone entering into a structured settlement factoring transaction where payments are being serviced and where the seller is only doing a partial sale, to name and confirm in writing both a primary and contingent beneficiary.

4structures.com LLC has a number of resources about the wisdom of naming beneficiaries on structured settlements

Why It's Important to Name a Beneficiary on a Structured Settlement Annuity

Structured Settlement Beneficiary Designations| The Beneficiary Mantra

 

Can You Inherit a Structured Settlement Annuity?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Thinking about what happens to structured settlement payments after the death of the Measuring Life, which of these four statements is correct when used to fill in the blank?

You can______________

1. inherit a structured settlement annuity
2. inherit the right to receive future periodic payments
3. inherit structured settlement payments
4. inherit a structured settlement

A.    1

B     2

C     3

D   2, 3 and 4

E.  all of the above

The correct answer is D, because nobody can actually inherit a structured settlement annuity. 

A structured settlement is established by contract between settling parties to a claim or lawsuit. When a structured settlement is established part of the consideration for the release of the Defendant is an obligation to make future periodic payments  (structured settlement payments). Generally this future periodic payment obligation is assigned by way of what is known as a qualified assignment to a qualified assignment company

In general, a structured settlement annuity is a qualified funding asset (defined at IRC 130(d) and owned by a qualified assignment company.  Neither a Payee, nor a Contingent Payee, actually owns the annuity contract funding the periodic payment obligation to them.

 

Structured settlement payments can be inherited by beneficiaries

 

Image Source: Giphy

Prudential Suspends Structured Settlement Rate Book Pricing Due to Extreme Rate Volatility

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Due to extreme interest rate volatility, Prudential Insurance Company of America has announced that it has suspended its structured settlement rate book

Prudential ad from 1909   Image: Wikipedia

pricing until further notice, effective March 6, 2020.

What Does This Affect?

Just new structured settlement quotes from Prudential from March 6, 2020.  

Why is This Necessary?

Insurers must have assets to match against liabilities under state insurance regulations.  Large volumes of business coming in under book rates present challenges that are increasingly difficult to manage when rates are shifting at warp speed.  It is actually smart risk mangement on the part of Prudential.

Is This Unusual?

Not at all, Berkshire Hathaway Life of Nebraska and First Berkshire Hathaway Life do not have a published rate book and use daily price quotes for everything.  Berkshire is usually there or thereabouts at the top of the production ladder for structured settlement annuity issuers along with others.

How long has Prudential Been in Business?

The Prudential Insurance Company of America  (PICA), based in Newark, New Jersey,  has been in business since 1875. 

As of September 30, 2019 PICA had $1.5 trillion is assets under management, $286 billion in admitted assets and approximately $4 trillion in life insurance in force worldwide. In January 2020 Prudential Financial was ranked the most admired life insurance company in the world by Fortune Magazine for the second consecutive year. As of year end 2018 it had over $831 Billon in assets.

 

 

 

Life Settlements vs Structured Settlement Factoring Transaction Underscores "Secondary Market Annuity" Marketing Fraud

by Structured Settlement Watchdog

By examining the difference between a life settlement transaction and a structured settlement factoring transaction we can continue to home in on why the use of the term "secondary market annuities" to market factored structured settlement payment streams is a marketing fraud on investors.

What is a Life Settlement?

The sale of a life insurance policy is called a life settlement.  A life settlement is the sale of an existing life insurance policy to a third party for more than its cash surrender value but less than its net death benefit. In a life settlement transaction, the policy’s owner transfers ownership of the policy to the buyer in exchange for an immediate cash payment and, in some instances, a reduced interest in the death benefit for the policy’s beneficiaries. The buyer of the policy pays all future premium payments and receives the death benefit upon the death of the insured (when the policy matures). A life settlement is different from a viatical settlement in that the individual insured on the policy has a longer life expectancy. In a viatical settlement, the life expectancy of the insured is 24 months or less.

Step 8 in the Life Settlement Process "The insurance carrier is notified of the change of policy ownership and beneficiary to the new owner, the provider."

[ Source: Life Insurance Settlement Association]

What is a Structured Settlement Factoring Transaction?

The term “ structured settlement factoring transaction "means a transfer of structured settlement payment rights (including portions of structured settlement payments) made for consideration by means of sale, assignment, pledge, or other form of encumbrance or alienation for consideration". [ Source:  IRC 5891(c)(3)(A)]

IRC 5891 (c)(3 (B) Exception Such term shall not include—
(i)the creation or perfection of a security interest in structured settlement payment rights under a blanket security agreement entered into with an insured depository institution in the absence of any action to redirect the structured settlement payments to such institution (or agent or successor thereof) or otherwise to enforce such blanket security interest as against the structured settlement payment rights, or
(ii) a subsequent transfer of structured settlement payment rights acquired in a structured settlement factoring transaction.

Fundamental differences between a life settlement and a structured settlement factoring transaction

1. Life settlement involves the sale of an actual policy. A structured settlement factoring transaction does not.
2. A structured settlement factoring transaction involves the transfer of structured settlement payment rights not the transfer of annuity ownership
3. A subsequent transfer of structured settlement payment rights is not a structured settlement factoring transaction or a transfer of annuity ownership since the annuity ownership was not transferred in the first place.

Licensing

Life settlements are typically under the purview of state life insurance departments. In Connecticut for example, life settlement is a line of authority under an insurance license. The state regulator has the power to fine, suspend or revoke the authority. By contrast regulation of authority to engage in structured settlement factoring transactions, solicit annuitants, solicit investors in factored structured settlement payments streams is the exception rather than the rule.

 

 

  

 

 

Structured Settlement Annuities Are NOT Tax Exempt

by John Darer CLU ChFC MSSC CeFT RSP CLTC

There is a false narrative concerning structured settlement annuities that claims that structured settlement annuities are tax exempt. Structured

Structured settlement annuities are not tax exempt. The focus is on the damages

settlement annuities are not tax exempt. Where used as a "qualified funding asset"  the structured settlement payments may be tax exempt, but the essential reason for the tax exemption is the damages that the payments from the structured settlement annuities represent.

For example:

1. Payments for workers compensation  see IRC 104(a)(1)
2. Payments for damages on account of personal physical injury, physical sickness and wrongful death, see IRC 104(a)(2)   [and IRC 104(c) for Alabama wrongful death]
3. Payments for wrongful imprisonment, see IRC 139F

Structured settlement annuities can be used to fund the payment of damages in settlement of lawsuits comprised of many types of taxable damages. Even though they are funded with structured settlement annuities, if established properly each payment in such cases is taxed in the year received.

I'm sure that the false narrative is not intentional, but what is surprising is the false narrative is articulated in public facing communications by certain people and companies with credentials and experience. Those who spread the false narrative, even unintentionally, may be used as sources of "validation" for content barfers in (or serving) the structured settlement secondary market. Clearly this does not serve the greater good for consumers or the industry.

 

 

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

Health Savings Account (HSA)

my opinion such assertion cannot be applied categorically and each situation should be looked at indepedently. This blog explores the question below.

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 $1,400 ($2,800 family) and maximum out of pocket limit of $6,900 ($13,800 family).

• Contributions are tax deductible
• Withdrawals from the HSA to pay qualified medical expenses are 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 2020?

• 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 2020?

The HSA contribution limits for 2020 are $3,550 for individuals and $7,100 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.   

 

 

 

Do You "Incur Interest" When You Accept a Structured Settlement As Broker Website Suggests?

by Structured Settlement Watchdog

A structured settlement brokerage firm has shattered the glass ceiling of incredulity, by  claiming a "popular choice among plaintiffs" is "delayed payments that don’t pay out until the plaintiff reaches retirement: To ensure a comfortable retirement, the money will stay out of reach and incur interest in order to grow the total amount". Well as Ben Marcus said "Submitting students to the rigors of learning seemed only to incur the wrath of many of them …— Ben Marcus, Time, 8 Jan. 2001

According to the Cambridge English Dictionary, the word "incur" means " to become subject to (something unwelcome or unpleasant) as a result of one's own behavior or actions". 

Are we expected to believe from the website of this entity,  that if you agree to a structured settlement with a delayed start date until retirement so it will (1) stay out of reach and (2) you will literally have to pay interest as the settlement planner states, and thereby be subject to something unwelcome or unpleasant, as a result of your own actions?  Now there's a real selling point!

Of course not, what the structured settlement consultant says is total howler since one DOES NOT "incur interest" in, or as a result of a structured settlement.

In the meantime, enjoy the Punnography™ !

Little Miss Muffit Sat on Her Tuffit Eating "Incurs and Whey"