Estate Taxes and Estate Planning Commutation Riders
Structured settlement annuities while income tax free are not free from estate taxes. The present value of the remaining guaranteed payments are includable in the estate for estate tax purposes. The estate taxes are due within nine months of death. How will the estate tax be paid if a structured settlement is established which provides only monthly income even after the plaintiff dies? Life insurance could be used except for the fact that most catastrophically injured victims are uninsurable due to their medical problems.
There is a solution to this problem and it is called an Estate Planning Commutation Rider. This rider provides that at death a certain percentage (up to 100%) of the remaining guaranteed structured settlement payments are commuted to a lump sum of cash. The rider can be added to any structured settlement annuity and is offered by all of the life insurance companies that provide structured settlements. There is no cost for this rider but it must be done at the time of settlement. The only thing that is required is that the settlement paperwork reflects that this rider is to be implemented at death.
The key issue is determining the commutation percentage. Your settlement planner should hire an accounting firm to determine the potential estate tax. The accountant should always be asked to determine the largest potential estate tax, which would occur if the plaintiff died in the first year of the annuity. That way you can commute enough of the annuity to cash to cover a worse case scenario. It certainly does no harm to commute too much. However, if too little is commuted that could cause an immense liquidity problem. Once you know the worse case scenario estate tax liability, you can then determine the commutation percentage.