Litigation

An Investors Business Daily editorial posted on July 21, 2010 sounds the tsunami early warning system over the tax increases that appear on our collective horizon. This posts examines the first wave, and the impact it will have on plaintiffs, lawyers, settlement planners, structured settlement planners, and other settlement industry stakeholders. including sellers seeking an exit strategy from homes or  businesses. Planning considerations and opportunities will be explored in a multi-part series.

A. As of 12:00am January 1, 2010 the estate tax is restored? at 55% on estates of $1 million or more. 

• Fact finding is going to be more important than ever. Settlement planners and financial planners must tally up assets and have a clear picture of the potential estate tax liability with and without a potential structure. The present value of remaining certain and guaranteed lump sum  structured settlement payments after the payee's death are generally included in and add to his/her estate.
• Structured attorney fee cases need to be planned even more carefully.  Large structure attorney fee cases with remaining guaranteed payments may not only add to the estate but may also be subject to income tax as income with respect to a decedent.
• The use of life insurance in the settlement planning process should move to the forefront. Properly designed life insurance can be used:
• Life insurance can provide a more cost efficient "cash now" scenario for heirs than not having the life insurance and selling the guaranteed payments in the secondary market.
• If the heirs want an annuity they can take the income tax free life insurance proceeds and purchase an annuity at prevailing rates or purchase structured settlement payment rights in the secondary market as an investor.
• If insurable, attorneys older than 45 may want to employ a life only structured attorney fee strategy while paired with a life insurance policy held in an irrevocable life insurance trust. The strategy is to maximize income while living but not add to the estate if dying to soon. The added benefit to the heirs is that they receive an income tax free lump sum (proceeds from life insurance death benefit) instead of having to wait for the taxable annuity payments.

The lowest bracket for the personal income moves to 15% from 10%. The next lowest bracket ? 25% ? will rise to 28%, the old 28% bracket will then be 31%. The 33% bracket goes to 36% and the 35% bracket becomes 39.6%.

• Increased income taxes improve the intrinsic value of income tax free amounts received with personal injury structured settlements and the tax deferral associated with structured attorney fees, structured employments cases and other structured taxable damage cases.

C. Marriage tax penalty returns

Settlement Planning considerations/Potential impact

• This incrementally increases the amount of  income tax on marrieds which in turn incrementally increases the intrinsic value of a structured settlement.
• The marriage tax penalty is difference between what you pay in taxes as a married couple and what you would pay as two single persons.
• The Congressional Budget Office estimated that in 1996 the average marriage tax penalty was about $1,400 which adversely affected 42% of all married couples. It was believed that some couples chose not to marry because of the tax penalty. The 2003 Jobs and Growth Tax Relief Reconciliation Act of 2003 had reduced the impact of the marriage penalty on married couples who choose to file jointly on their income taxes. This was done by equalizing the standard deduction for singles and married couples and increasing the end point of the 15 percent tax bracket for married couples filing jointly.

D. Capital gains

Jumps 33% ? to 20% from 15%.

Tax on Dividends

The tax on dividends will go all the way from 15% to 39.6% ? a 164% increase!

Both the cap-gains and dividend taxes will go up further in 2013 as the health care reform adds a 3.8% Medicare levy for individuals making more than $200,000 a year and joint filers making more than $250,000. 

Settlement Planning considerations/ Potential impact

Increase in capital gains tax will make structured installment sale exit strategy more attractive. Structured sales are an improvement on the traditional installment sale. They help sellers of real estate and businesses who have low basis high value assets mitigate capital gains exposure in the year of sale.

The increased tax of dividends on capital gains will become and even more important factor to consider when comparing income tax free structured settlements to alternative investments such as high dividend paying stocks.

E. Halving the child tax credit to $500 from $1,000

Settlement Planning considerations/ Potential impact

Yet another incremental tax increase that will increase the intrinsic value of structures.

F. Fixing the standard deduction for couples at the same level as it is for single filers.

see E.

Americans for Tax Reform lays out other tax hikes designed to pay for ObamaCare such as:

The Medicine Cabinet Tax. "You will no longer be able to use health savings account, flexible spending account, or health reimbursement pretax dollars to purchase nonprescription, over-the-counter medicines (except insulin)."

All the "nickel and diming" adds up!  

MORE TAXES+ GREATER INTRINSIC VALUE FOR NEW AND EXISTING STRUCTURES, even in a low interest rate environment. Check out the taxable equivalent yield chart at 4structures.com and see the how that "puny 3% rate of return",  "ain't to shabby" if you're in the 40% tax bracket.