Important Note: While structured settlement payments are
income tax free, in the event of death of the structured settlement payee, the present value of any due, but not received, certain or guaranteed lump sum future structured settlement payments would be included in the estate of the decedent. Thus they may be part of the
estate or inheritance tax calculation.
Estate or inheritance taxes, a tax on your right to transfer property at your death, may apply on both a Federal and statewide level. The Federal exemption is $5,490,000 for 2017, so unless you have a very large settlement in which the present value of the remaining settlement payments at the time of death is in excess of the exempt amount, or the present value of the structured settlement at time of death plus other asset in the name of the decedent at the time of death, the Federal may be less of an issue. State estate and inheritance taxes in some states however, may have lower exemptions and estate and inheritance taxes might be applicable.
Sample State Estate Tax Exemptions
NY $5,250,000 (death after April 1, 2017). Will increase to equal Federal Estate tax exemption January 1, 2019.
The current trend is the effective reduction or elimination of state estate taxes through increasing of exemptions. DE and NJ will repeal their estate taxes effective December 31, 2017. DC will increase its exemption to the federal exemption for those who pass after December 31, 2017. MN, RI and WA are gradually increasing their exemptions
The use of a full or partial "death commutation rider" may be helpful on the larger cases to which estate and inheritance taxes may apply and liquidity is likely to be an issue. The downside is that the commutation percentage must be decided at time of settlement and may be more or less than needed. At least one company offers a Hardship Exchange at comparably favorable rates to its annuitants which uses the procedure set forth in IRC §5891, permitting a more precise liquidity event.