How Does the Estate Tax Affect Structured Settlements? What is the Estate Tax? The Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. Of interest to structured settlement recipients is that Estate Taxes are due on the present value, as of date of death of any remaining guaranteed or certain periodic payments.
IRC Sec. 2033 provides that the value of the gross estate shall include the value of all property to the extent therein of the decedent at the date of death.
IRC Sec 2039(a) provides that the gross estate shall include the value of an annuity or other
payment receivable by any beneficiary by reason of surviving the
decedent under any form of contract or agreement if, under such contract or agreement, an annuity or other payment was payable to the decedent, or the decedent possessed the right
to receive such annuity or payment, either alone or in conjunction with
another for his life or for any period not ascertainable without
reference to his death or for any period which does not in fact end
before his death.
It is the latter part of 2039(a) which affects structured settlements and on large cases the impact of estate taxes must be considered. There are a number of techniques to do this including, but not limited to, maintaining a sufficient cash reserve, using an insurance trust or making sure a commutation rider is included at the time of formation of the structured settlement. In the mid 1990s an IRS Private Letter Ruling was obtained by Allstate LIfe Insurance Company, and certain taxpayers, in conjunction with a medical malpractice case in the State of New York. The rider provided for commutation of a percentage of guaranteed remaining structured settlement payments after the annuitant’s death. The PLR provided that such a rider in the structured settlement annuity and provided in the settlement agreement would not void the income tax treatment
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) included an Estate Tax repeal in 2010, which will become a nullity in 2011 (i.e. revert to higher pre-EGTRRA rates and lower exemptions) unless Congress revises the law between now and 2011 Whether the Federal Estate Tax will be resurrected in 2011, and if so, in what form, will depend upon who has the power in Washington, the state of the economy, and other factors. The discussion is ongoing in Congress of late.
The Estate Tax Extension of Tax Relief Act of 2006 (HR5970), a compromise bill passed the house and is now up for a battle in the Senate. Here are the rates and exemptions in HR5970
Year Top Estate Tax Rate Exemption Amount
- 2010 40% $3.75MM
- 2011 38% $4.00MM
- 2012 36% $4.25MM
- 2013 34% $4.50MM
- 2014 32% $4.75MM
- 2015 30% $5.00MM
Should the bill make it through the Senate it will clearly reduce the number of structured settlements exposed to estate taxes, particularly certain where the quantum is high and the potential duration long and unpredictable such dealing with severely neurologically impaired infants and adults and quadriplegia.
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