The SECURE Act and Settlement Planning
John Darer • January 31, 2020
"Here's Looking At You Kiddie" and the New "Rule of 72"
What is The Secure Act?
The Setting Every Community Up for Retirement Enhancement (SECURE)
Act,
passed in December 2019, includes many bi-partisan reforms that increase access to workplace plans and expand retirement savings. Generally, the retirement legislation includes policy changes that will impact defined contribution (DC) plans, defined benefit (DB) plans, individual retirement accounts (IRAs) and 529 plans. But there are a couple of areas where the SECURE ACT
may intersect with personal injury settlement planning in addition to planning for certain non-personal injury claimants and financial planning for lawyers. January 1, 2020 was the effective date for most of the provisions of the SECURE Act.
Kiddie Tax Rates under TCJA Repealed
What is The Kiddie Tax Rule?
The so-called Kiddie Tax originated in the Tax Reform Act of 1986, P.L. 99-514, as a solution to counter a popular tax-saving strategy for high-income families of funneling their unearned income through their children to reduce their overall taxes in the 1980s. The Kiddie Tax served to limit the effectiveness of parent-children income shifting, by taxing certain amounts of children's unearned income at a very high rate.
What Does The Repeal Mean?
The SECURE Act repeals the draconian application of trust tax rate schedule to unearned income of a minor that was charged pursuant to the Tax Cuts and Jobs Act of 2017. The quick ramp up in trust tax rates saw the 37% rate applied at $12,950 for 2020. But a single taxpayer or single and head of household in 2020, would not reach that level until an income level of $518,401 taxable income levels. Moreover a married couple , filing jointly would not reach that level until reaching taxable income of $622,051. Prior to TCJA unearned income above a certain threshold was taxed at the parent or parents' (as applicable) marginal tax bracket. The repeal restores the prior methodology.
The kiddie tax rule found at IRC § 1(g), means (again) "taxes certain unearned income of a child at the parent's marginal rate, no matter whether the child can be claimed as a dependent on the parent's return".
What Does Unearned Income Mean?
Unearned income for purposes of the Kiddie Tax means income other than wages, salaries, professional fees, and other amounts received as compensation for personal services. So among other things, unearned income includes capital gains, dividends, and interest.
How do structured settlements help mitigate kiddie tax issue?
Where minor dependents are receiving structured settlements that represent damages on account of physical injury, physical sickness or wrongful death, the payments are income tax free. They are not part of kiddie tax calculations. Therefore an allocation to structure may be helpful.
New "Rule of 72" | Require Minimum Distribution Start Date Extended
Instead of having to begin withdrawing money from retirement plans at age 70.5, the plaintiff can continue to defer for an additional 18 months to age 72 before withdrawals must begin. Deferring gives an opportunity to earn more tax deferred growth. The amount you must withdraw is determined by dividing the balance of each qualifying account by your life expectancy as defined by the IRS. A tax-free payment stream from a personal injury or wrongful death structured settlement could help the plaintiff better "afford" to defer the start of taxable income. Widows and widowers, older children survivors in a wrongful death case, older claimant in general may benefit the most from this new opportunity. If you're in decent health and have good longevity in your family, you can also use a structured settlement payment stream to delay taking social security until 70 to maximize your benefit.
The SECURE Act also eliminates stretch IRAS, which allowed the inheritance of an IRA that could then be stretched over the beneficiary's life expectancy. Beginning with deaths of 401k and pension plan participantswners or IRA ownersplan participants or IRA owners in 2020, distributions must generally be taken over the following 10 years.
Deferring gives an opportunity to earn more tax deferred growth.
USAA Life Insurance Company, an A++ rated insurance company, issues structured settlement annuities with 1%, 2% and 3% COLAs. USAA Life structured settlements are exceptionally compatitive on lifetime benefit payments with long duration certain periods for ages under 35.
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A qualified assignment is part of the process to establish a structured settlement that enables a Defendant, Insurer, or Qualified Settlement Fund, to achieve a complete novation of the future periodic payment claim established by suit or agreement, through a substitution of obligors.
An annuity and a structured settlement walked into a bar, how do you tell them apart? 4structures' John Darer reviews the differences for you right here.
A lifetime structured settlement annuity turns part of your settlement recovery into guaranteed income you can’t outlive that is contractually guaranteed by a regulated life insurance company. A lifetime annuity is sometimes referred to as longevity insurance.
Structured settlement annuities can be very helpful to the budgeting process by providing guaranteed income streams and deferred lump sum payments tailored to specific budget needs and time frames identified in the settlement planning process.
Structured settlement receivables are often deceptfully marketed to investors as annuities. When the originating structured settlement factoring company buys structured settlement payments in a structured settlement factoring transaction, they are buying a receivable not an annuity.
Avoid constructive receipt if a structured settllement or structured attorney fee is to be established. Care must be taken to avoid constructive receipt.
Financial services provider USAA ranks 94th on Fortune 500. USAA Life Insurance Company, which earns the top rating of A++ from AMBest is often super competitive on longer term payment streams.
John Darer reviews Prudential Income Advantage structured settlement annuity, which provides indexed structured settlement annuity option with the potential to grow personal injury settlement funds while offering protection from market declines. 2 IRS Private Letter Rulings!
