Jeremy Babener has written a new tax article titled "Death and Damages Can be Taxing" which appears in the April 2011 issue of Trusts & Estates magazine. Written for estate planning professionals, Babener's article addresses both income and estate tax issues involved with lump sum and structured settlements.
Babener's article considers physical and emotional damages resulting from three categories of cases: wrongful death, survivor lawsuits, and pre-death causes of action. In addition to his tax analysis, Babener provides three instructive case examples plus practice tips, a summary table and extensive footnotes.
Babener's article re-affirms, from S2KM's perspective, several important settlement planning lessons:
- The complexity of settlement planning and the importance for many recipients of personal injury and wrongful death settlements to receive timely and related tax advice from tax professionals. Although Babener's audience consists of estate planning professionals who may not always contribute to case-specific pre-settlement planning, they may be called upon post-settlement to address income or estate tax problems created by a poorly planned settlement. Classic "red flag" structured settlement cases include large periodic payouts with long certain periods or large deferred lump sums.
- The importance, when planning settlements, to consider potential future tax changes including estate tax rates and/or the amounts of allowable estate tax exclusions and deductions. Recent estate tax exemptions that shelter extensive sums from any estate tax may not exist when current structured settlement recipients die with still-to-be paid periodic payments.
- The role of allocations in settlement tax planning and tax calculations. As one example, Babener discusses a wrongful death preceded by substantial pain and suffering related to the accident causing the death. Although proceeds from a wrongful death settlement are not subject to estate tax, proceeds related to the pain and suffering will be included in the decedent's estate and will be subject to a potential estate tax. In another example involving co-plaintiffs, Babener suggests naming the more injured party as the primary structured settlement payee and the less-(emotionally) injured plaintiff as contingent structured settlement beneficiary.
- The potential estate planning problems created by structured settlements including valuation of any periodic payments remaining when the primary payee dies and the potential lack of liquidity to pay estate taxes. Babener highlights a current judicial controversy potentially applicable to structured settlements related to Treasury regulations issued in 1995. These regulations provide that a "restricted beneficial interest subject to any contingency, power or other restriction" will be valued for estate tax purposes based on all facts and circumstances rather than by Treasury tables. Whether structured settlement payments are considered to be "restricted beneficial interests" (due to non-assignability clauses) becomes financially significant in calculating estate tax liability. Babener also points out the potential value or need for commutations or factoring transactions to pay estate taxes resulting from structured settlements.
- The risks for claimants and their attorneys in relying on non-tax professionals for settlement planning tax advice. This caveat was highlighted in Adrian v. Mesirow Financial Structured Settlements, a 2010 judicial decision (not mentioned in Babener's article) where a claimant alleged she was mislead by a defense broker about the favorable tax consequences of a structured settlement. In holding that the defense owed no duty to the claimant, the court found that the broker's education, certifications and years of experience related only to her work in life insurance and structured settlements and did not and should not suggest any expertise or special knowledge of tax law.
For additional tax and structured settlement articles by Jeremy Babener, see his Tax Structuring website and S2KM's structured settlement public policy wiki.
For additional information about the taxation of structured settlements, see Chapter 2 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).
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